Why do we pay sales commissions? • Hacker News Board

Re: Why do we pay sales commissions?

#51

Post by bcrescimanno » Wed, Jan 04, 2012, 9:34 PM UTC

deltaqueue wrote: post #35

bcrescimanno wrote: post #21

Earlier quoted context omitted.

I agree with your thinking that some sales folks might balk at the notion; but I'm not sure I follow your argument you should be directly (financially) rewarded for the additional effort in the larger deal. I've known several sales folks who chase many small deals simply because they're a lot easier to manage, require less time to close, and by collecting as many of them as possible, they're able to maximize their co…

"I'm not sure I follow your argument you should be directly (financially) rewarded for the additional effort in the larger deal. I've known several sales folks who chase many small deals simply because they're a lot easier to manage, require less time to close, and by collecting as many of them as possible, they're able to maximize their commissions." What's the difference? In either scenario, you are rewarded propor…

There isn't a difference; your post (to me) implied that people working on more complex deals should be more highly rewarded. My argument is more that removal of commission-based compensation doesn't necessarily remove the concept of reward for hard work. All it does is decouple it from each individual sale. Better people who work better / smarter (should) still be compensated appropriately.

I completely agree with your assessment of sales commissions elsewhere--and I think we've all seen enough of a share of unfair, incompetent management to understand the rationale. That said, I also agree that there is some serious baggage that comes with commission-based compensation and it's worth a look to dump it.

Re: Why do we pay sales commissions?

#52

Post by krschultz » Wed, Jan 04, 2012, 9:35 PM UTC

johngalt wrote: post #18

I was very pro-comissions until I worked commissioned sales. Completely agree with the author. I had extremely high numbers, but I hated the work environment. Suddenly every other salesperson wants a piece of you. Trying to stick their names in for a percentage of the sale. Screwing my long term clients for a very small short term sale. Even breaking into my desk to copy my book of business. Adding commissions = scor…

I didn't have that at all. I did did commissioned sales for several years, and then I worked at a company as an engineer that had commissioned sales guys. Yes, you had to hand out the new customer leads equitably or people would freak out. But none of the stuff you mentioned happened. That sounds like a toxic work environment.

edit: I worked at a place where the salary was enough to cover me and the commission was a bonus of 50-150% on top of the salary. I always knew I was at least starting at a living wage. If I was starting at 0, it might be different. Also, we would do 1-2 sales per day, so the volume was high enough that a lead here or there didn't matter. But in businesses where a sales guy makes 3 or 5 sales a month, I can see why each individual sale can be fought over.

Re: Why do we pay sales commissions?

#53

Post by paulhauggis » Wed, Jan 04, 2012, 9:47 PM UTC

"Our salespeople all estimated that they were spending about 20% of their time just keeping track of what money was due them. There was constant horse trading."

I had to laugh at this. How is this that difficult? An excel spreadsheet with a few columns might only take a 20-30 minutes per day (if that). If it's based on a percentage, excel can automatically calculate that based on a column. I am a re-seller for a few products online and this is exactly how I calculate it. I have another sheet that tallies all of my monthly revenue. I can't imagine it being much different when selling services or products for a company like Fog Creek. You could also keep track of all names/companies, etc. here.

I'm going to offer another perspective: Fog creek basically just gave themselves a pay raise. Rather than giving salespeople a cut of the sales, they now are paying them a flat-fee.

Some people may like this because now they have consistent income. However, it's much less than what they could potentially earn. If I was a salesperson there, I would quit. I would like to see the results of this in 1 year (or 5 years). I suspect they will switch back to a commission-based system within that time-frame.

It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.

In a way, it's like converting from free-market capitalism (you have no limit to your success) to communism (everyone is now equal).

They do this to developers all the time. Every job I've ever had has been based on salary. This sounds great, until you realize that the employer now has no incentive to keep you within 40 hours/week.

At one company, the new COO came in and announced that new working hours were an hour earlier and half-an-hour later. Everyone working there was on salary, so we essentially all got a pay-cut.

Re: Why do we pay sales commissions?

#54

Post by maaku » Wed, Jan 04, 2012, 9:47 PM UTC

AnonSales wrote: post #33

Long time HN contributor, first time I've felt the need to go anonymous. I've been in sales my entire professional career, but always commissioned based. I've worked in SMB with small teams and enterprise with massive teams. I feel like these are related points (to paying commission), but you may have a different opinion. First, commission is like crack. Once you get a taste, it's hard to kick. Earning potential is o…

* Commissions are typically paid on a contract, not on the lifetime value of the customer. *

If I give my sales people a cut of the lifetime value of a customer instead of the immediate contract, would that be better or worse?

Re: Why do we pay sales commissions?

#55

Post by [deleted] » Wed, Jan 04, 2012, 9:48 PM UTC

paulhauggis wrote: post #32

sunchild wrote: post #26

Earlier quoted context omitted.

Unfortunately, some of the most successful software vendors in the world have turned over-promising and risk-shifting into a way of life. For a million reasons, the market tolerates this injustice, and more often than not rewards it. It's hard not to be bitter about it.

I'm actually fine with it. As long as I'm not one of the developers working overtime with no extra pay to get these over-promised features finished. That's the worst part. The sales guys get a bonus and the developers get an 80 hour work-week.

[deleted]

Re: Why do we pay sales commissions?

#56

Post by swombat » Wed, Jan 04, 2012, 9:53 PM UTC

jxcole wrote: post #29

edw519 wrote: post #8

...and are less worried about who is going to buy right now... So you implemented a system that makes people less worried about the most important thing to worry about? OP makes many fine arguments about the pros and cons of commissions, but this one little nit trumps them all. There are many reasons for businesses to suffer and eventually die: capitalization, profitability, positioning, etc. but insufficient revenue…

I disagree strongly, even after your edit. Revenue right now does not ipso facto translate to a better or more sustainable business. Google is a great example. They could plaster their front page with advertisements which could, quite possibly, generate more revenue right now. But they know that users having a good experience right now will bring them back tomorrow. So they put off some possible ad revenue in the hop…

Actually, plastering their home page with ads would most likely cost Google revenue right now, because they will get a far higher conversion rate on their ads once they actually know what it is you're looking for. And once you've searched, you might notice that the page is indeed plastered with ads.

More importantly, we're talking about salespeople hired to scale up a proven business model, not entrepreneurs exploring different ways to make money.

Focusing on the "right now" as an entrepreneur can cause all sorts of issues, but if you hire a salesperson to sell your known product to a known target market based on a known process, they better fucking well be focused on closing the sales right now. It obviously depends on the industry, but I'd say that in most cases in B2B, without the drive of a salesperson trying to close the deal right now, every deal will take twice as long and half the deals will probably never close at all.

Re: Why do we pay sales commissions?

#57

Post by swombat » Wed, Jan 04, 2012, 9:56 PM UTC

funkah wrote: post #14

edw519 wrote: post #8

...and are less worried about who is going to buy right now... So you implemented a system that makes people less worried about the most important thing to worry about? OP makes many fine arguments about the pros and cons of commissions, but this one little nit trumps them all. There are many reasons for businesses to suffer and eventually die: capitalization, profitability, positioning, etc. but insufficient revenue…

You've really gotta be looking for something to disagree with if that's what you've decided to hang your hat upon. The words "right now" were emphasized in the original sentence for a reason. If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.

If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.

Because the reason why sales didn't drop might be because of wider factors that outweighed the removal of commissions. Once/if the "water level drops" and management start panicking, they might consider reversing their position on sales commissions, at least to see if it makes a difference for the better.

Seems like a pretty obvious line of thinking to me.

Re: Why do we pay sales commissions?

#58

Post by ceejayoz » Wed, Jan 04, 2012, 9:59 PM UTC

paulhauggis wrote: post #53

"Our salespeople all estimated that they were spending about 20% of their time just keeping track of what money was due them. There was constant horse trading." I had to laugh at this. How is this that difficult? An excel spreadsheet with a few columns might only take a 20-30 minutes per day (if that). If it's based on a percentage, excel can automatically calculate that based on a column. I am a re-seller for a few…

> It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.

Well, that was dumb.

Ditching commission doesn't mean performance can't be rewarded, via bonuses for good performers, generous raises when merited, etc.

Re: Why do we pay sales commissions?

#59

Post by buzzcut » Wed, Jan 04, 2012, 10:00 PM UTC

JumpCrisscross wrote: post #49

buzzcut wrote: post #27

Earlier quoted context omitted.

I linked to the video where Ariely talks about the U-shaped effect (that is small rewards increase, but large ones decrease, performance). I mentioned him to demonstrate that there was some evidence for the notion, not to say that he entirely makes the case I'm arguing for. Given the thousands of ways commissions can go wrong, I'm asking whether any small increase in benefit is ever outweighed by the problems.

I think it would be fine if it added a note in parenthesis clarifying that. The question you have posed, whether the small benefit outweighs the many risks, is a valid one, but one that needs to have the premise of the small benefit established. I suppose, in a purely theoretical discussion corner-stoned by Ariely's research, the question becomes whether sales is a more mechanical or creative task. I would argue that…

Good point. I'll try to add a little qualifier.

I would say that sales is definitely a creative task (but you're right that's the important question w/r/t Ariely). There is a rote aspect to working the phones, or keeping records, but sales is a performance skill that requires a lot of thought about strategy, rhetoric, timing, etc. etc. By no means is it rocket science (I wrote a bit about that here: http://www.fogcreek.com/guide/The-most-basic-things-your-com...), but there is a lot to consider and get good at.

Re: Why do we pay sales commissions?

#60

Post by swombat » Wed, Jan 04, 2012, 10:02 PM UTC

binarymax wrote: post #2

I will tell you, for anyone who actually helps to build the selling product, there is nothing worse than watching a salesperson completely oversell a project, walk away with a fat check, and you are left holding the bag and working overtime.

Good old story:

A salesman and a programmer go on a bear hunting vacation together. As they arrive at the log cabin in the wood, the salesman tells the programmer: "Ok, why don't you unpack and get everything set up, and in the meantime I'll go find us a nice fat bear."

The sales guy leaves and the programmer start unpacking. An hour later, as he's about half done and taking something out of the car, he hears a loud roar coming from some bushes near the cabin. He looks and sees the salesman shoot out from the bushes, with a huge, snarling, growling, drooling bear charging behind him. The bear is enormous, all jaws and claws and muscle.

The salesman runs straight for the door of the cabin, the bear right behind him. At the last moment, he steps to the side. The bear, carried by its momentum, crashes into the cabin. The salesman quickly closes the door and locks it behind the bear. Loud noises come from inside as the bear trashes the place and tries to find its way out.

The salesman turns to the programmer and says:

"Ok, phew, that's one done. I'll go find another one while you skin this one."