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Why do we pay sales commissions?

blog.fogcreek.com

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Re: Why do we pay sales commissions?

#71

Post by matwood »

briandoll wrote: post #13

IMHO, a key reason this works well for them is that their compensation package is really nice and well rounded: http://www.joelonsoftware.com/articles/fog0000000038.html In short: they pay market rates based on a transparent internal system of scale, they have a generous profit sharing plan (thus motivating everyone to increase profits regardless of role) and excellent benefits (health and non-health related). It's h…

That's what I was coming to say. At FogCreek basically the entire company is on commission (profit sharing), which is how it should be.

Re: Why do we pay sales commissions?

#72

Post by AnonSales »

swombat wrote: post #56
jxcole wrote: post #29

Earlier quoted context omitted.

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 explori…

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

I don't think it was intended, but that's a condescending statement. That's like saying "I'm looking for developers to just write some code, not find ways to do it better." A good salesperson should be looking for different ways to make money for their client, their company, and effectively (profit sharing) themselves.

Additionally, most sales managers are promoted sales people, not necessarily cunning business people. A "known process" rarely exists.

ps, I'm a big fan of your blog and contribution here, so please go easy on me.

Re: Why do we pay sales commissions?

#73

Post by AnonSales »

masklinn wrote: post #68
AnonSales wrote: post #62

Earlier quoted context omitted.

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).

I know not all accelerators work this way, but some are retroactive for business closed in the period. For example:

25% of 500 = $125 vs 15% of 499 = $75

But in other instances, you're right, and typically the salesperson knows exactly which deal matters the most.

Re: Why do we pay sales commissions?

#74

Post by AnonSales »

yuhong wrote: post #70
AnonSales wrote: post #62

Earlier quoted context omitted.

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.

Equity would get complicated, quickly. Profit sharing seems to be an easier route.

I'm not sure I agree with sales being in product development. You run the risk of having a sales person champion an idea as the greatest thing on earth, only to find out the market size is exactly 1. The salesperson should, however, be concerned with the customer's satisfaction long after the deal is signed.

Re: Why do we pay sales commissions?

#75

Post by wtvanhest »

AnonSales wrote: post #67
contravert wrote: post #50

Earlier quoted context omitted.

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."

It depends on the type of sales. Selling two sided markets is much, much harder. Through in required analysis and it takes a lot.

Examples: Real estate Brokerage &

Investment banking

Etc.

I am intrigued by the idea of no commissions in some if not all sales jobs. If the person isn't selling you can fire them. If they do well in the managers judgment you can bonus them. While it is subjective, almost all business decisions are. A good manager is good at making good subjective decisions.

Re: Why do we pay sales commissions?

#76

Post by teaspoon »

tptacek wrote: post #66
onemoreact wrote: post #61

Earlier quoted context omitted.

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 w…

In the common case, selling someone $50,000 of licenses is a $50,000 win for the company.

That actually sounds like a very uncommon case. Even fully client-side software has variable costs in the form of support costs.

Support costs aren't relevant to your parent's example, but they do imply another misalignment of incentives. If a salesperson's commission is based on revenue alone, she'll just as soon sell to a costly, high-maintenance customer as to a profitable, low-maintenance one.

Re: Why do we pay sales commissions?

#77

Post by tptacek »

teaspoon wrote: post #76
tptacek wrote: post #66

Earlier quoted context omitted.

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 w…

In the common case, selling someone $50,000 of licenses is a $50,000 win for the company. That actually sounds like a very uncommon case. Even fully client-side software has variable costs in the form of support costs. Support costs aren't relevant to your parent's example, but they do imply another misalignment of incentives. If a salesperson's commission is based on revenue alone, she'll just as soon sell to a cost…

This is also a wrinkle that comes up managing sales organizations, which is why sales account managers often get different comp rates for different products.

Again, just two issues I have here:

(1) Dev incentive comp and sales incentive comp aren't particularly comparable.

(2) Huge compensation for the best sales managers is an economic reality, not a philosophical issue, and if you're not going to compensate variably, you're shifting a lot of risk from the sales manager back onto the company.

Re: Why do we pay sales commissions?

#78

Post by [deleted] »

swombat wrote: post #60
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…

[deleted]

Re: Why do we pay sales commissions?

#79

Post by unobfuscate »

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…

Having lived through a company with long sales cycles (3-6 months +), they needed to pay sales people for the first 6 months, driving them down to full commission/zero pay after a year. So the experimentation was needed whether they were being hired on salary, or moving toward commission.

This is probably completely different for lower ticket items that have shorter sales cycles (like bug tracking software). But it also speaks to the risk they took, given that they weren't wasting money experimenting on the sales staff. (their effectiveness was quickly apparent).

Re: Why do we pay sales commissions?

#80

Post by johngalt »

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"?

Maybe it was colored by my expectations going in. With no prior experience, I'd assumed that sales was an arcane art. A combination of charisma and manipulation. Working in a sales role, I felt out of my element for months. Until I learned that sales is a building process just like anything else.

Create a system where you maximize the number of people weighted by their need of what you sell. Presented at a timely moment. The client should see you as a domain expert, and someone who makes the process frictionless. Pricing is a surprisingly small part of it. If you can build a good process, you'll sell 10x what the car salesman types will.

Unconventional approaches to sales are the most successful, so a hacker mindset pays off. Once I got over my initial fears, it was quite easy to get the high score :)

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