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Why do we pay sales commissions?

blog.fogcreek.com

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Re: Why do we pay sales commissions?

#61

Post by onemoreact »

tptacek wrote: post #42

I have trouble with a comparison between incentive comp schemes for programmers and sales commissions. One of the biggest problems with programmer incentive comp is the need to align it with business goals --- which is why you'd have to be an idiot to pay per-line-of-code. Programmer comp is several layers of indirection away from company income. The same is not true of sales comp. Salespeople earn commissions on mon…

Sales only directly links to the bottom line in the vary short term. If SAM up sells a customer on something they regret buying then the company can easily lose out on 20x sales for that short term bump. More importantly if Sally answers a phone call from SAM's client who want's some info but is not buying anything that day then it's hard to structure things she is interested in providing info vs trying to promote an instant sale.

Re: Why do we pay sales commissions?

#62

Post by AnonSales »

maaku wrote: post #54
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?

That's a really good question. The short answer is, "it depends."

In my mind, the problem is that commission is an incentive to do whatever it takes to close the deal -- especially if you're in an uncapped commission with accelerators. For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right?

I (the commissioned salesperson) would lie to my mom if I'm at $490 with a $12k deal on the table. I'll lie to you, and I'll tell you things about our product/service that aren't true. You'll do this one project with us, I'll get my gigantic commission check, and then you'll a) never come back b) tell everyone you talk to about us and c) not affect my commission check. I'll also put on my resume that I "exceeded monthly quotas" and smile. Remember, I'm here to get paid. That's why we're in a commission-based role. [edit: Please keep in mind that I'm giving accounts of what I've seen, not necessarily what I've done. I wouldn't lie to my mom. Others would.]

I believe you can mitigate that problem by paying out over a term, or upon certain achievements (deployed, customer gave us a positive rating, etc.). However, what additional problems does that create in your organization? Is it good or bad to have the salespeople managing (micro or otherwise) the delivery ("selling is not delivering")? Does that compensation model get too complicated?

Call me an optimist, but I wish companies would hire people that want to truly evangelize their widgets, put them on a base salary, and then measure performance. Sales isn't rocket science, it just takes someone who is comfortable talking to people...and when you're selling something you believe in, that's really easy to do.

Re: Why do we pay sales commissions?

#63

Post by jacques_chester »

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…

> 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.

Fog Creek have taken on the sales risk entirely from the sales staff. It's not a one-way trade.

Re: Why do we pay sales commissions?

#64

Post by [deleted] »

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…

[deleted]

Re: Why do we pay sales commissions?

#65

Post by dmitriy_ko »

deltaqueue wrote: post #11

I suspect FogCreek had success because their sales team is relatively small, but I'm curious to see how this works long-term. Is a lack of commission structure going to deter future recruits? They said nobody left, but have they tried hiring any additional sales reps? Big time sales reps will assuredly balk at the prospect of cutting their income to some average amount, but perhaps that type of employee only exists a…

>a friend of mine optimized some javascript, reduced the file size, and this ultimately saved his company over $200,000 a year in bandwidth.

Is this a real-life example or a hypothetical situation? Hard to imagine this to be realistic unless this is one of the top 100 sites in the world.

Re: Why do we pay sales commissions?

#66

Post by tptacek »

onemoreact wrote: post #61
tptacek wrote: post #42

I have trouble with a comparison between incentive comp schemes for programmers and sales commissions. One of the biggest problems with programmer incentive comp is the need to align it with business goals --- which is why you'd have to be an idiot to pay per-line-of-code. Programmer comp is several layers of indirection away from company income. The same is not true of sales comp. Salespeople earn commissions on mon…

Sales only directly links to the bottom line in the vary short term. If SAM up sells a customer on something they regret buying then the company can easily lose out on 20x sales for that short term bump. More importantly if Sally answers a phone call from SAM's client who want's some info but is not buying anything that day then it's hard to structure things she is interested in providing info vs trying to promote an…

These are real concerns but they just aren't the common case in sales. In the common case, selling someone $50,000 of licenses is a $50,000 win for the company.

Moreover, most sales account managers are intrinsically motivated to set things up for the 20x sale, because they're likely to own the account when the 20x home run comes in.

Most sales teams have spiffs set up to account for the "real estate agent" problem where short-term deal flow trumps revenue maximization.

I agree that managing a direct sales team is a hard problem, but in terms of designing an incentive comp plan, it's hard to argue that it isn't easier than doing incentive comp for developers.

Re: Why do we pay sales commissions?

#67

Post by AnonSales »

contravert wrote: post #50
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…

Can you elaborate on what you mean by "how easy it is"?

I don't want to speak for John, but this is my answer to the same question: "Sales isn't rocket science, it just takes someone who is comfortable talking to people...and when you're selling something you believe in, that's really easy to do."

Re: Why do we pay sales commissions?

#68

Post by masklinn »

AnonSales wrote: post #62
maaku wrote: post #54

Earlier quoted context omitted.

* 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?

That's a really good question. The short answer is, "it depends." In my mind, the problem is that commission is an incentive to do whatever it takes to close the deal -- especially if you're in an uncapped commission with accelerators. For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right? I (the commissioned salesperson) would lie…

> For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right?

Why would you do that if the 25% is only on the 500+ stuff? It's not like those $2k at 25% ($500) are going to be very significant compared to the 300k@10 ($30000) and the 200k@15 ($30000 as well).

Re: Why do we pay sales commissions?

#69

Post by matwood »

deltaqueue wrote: post #11

I suspect FogCreek had success because their sales team is relatively small, but I'm curious to see how this works long-term. Is a lack of commission structure going to deter future recruits? They said nobody left, but have they tried hiring any additional sales reps? Big time sales reps will assuredly balk at the prospect of cutting their income to some average amount, but perhaps that type of employee only exists a…

and yet I still think a $200,000 deal requires more work and yields more profit for the company than a $5,000 deal, and thus I should be rewarded for that additional effort.

Interesting. I wrote a particularly tricky piece of code today. It required much more effort on my part than some simple code I wrote last week, so I need to be rewarded for that additional effort. Oh wait, I am rewarded with a salary for doing what I was hired to do - solve problems writing code.

What FogCreek is saying is that it should be the same thing in sales. You're hired to do sales. It doesn't matter if it's $10 or a million dollar deal, that's your job. Why should it be any different than any other salary person?

Another interesting thing to me is when sales people talk about all their great sales, but seem to forget that someone created the product they are selling. If thought about in that manner each sale should cause the entire company to get paid. In fact, that's exactly what pays the salaries of everyone who works there.

Re: Why do we pay sales commissions?

#70

Post by yuhong »

AnonSales wrote: post #62
maaku wrote: post #54

Earlier quoted context omitted.

* 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?

That's a really good question. The short answer is, "it depends." In my mind, the problem is that commission is an incentive to do whatever it takes to close the deal -- especially if you're in an uncapped commission with accelerators. For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right? I (the commissioned salesperson) would lie…

Yea I suggest cooperation with engineering before: http://news.ycombinator.com/item?id=3148143

Also consider equity or profit sharing in the company too.

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