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Why do we pay sales commissions?

blog.fogcreek.com

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Re: Why do we pay sales commissions?

#81

Post by tptacek »

unobfuscate wrote: post #79
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 a…

That's what happens when a company introduces its first successful product, but it isn't the steady state for a sales team, which will bring new account managers on for a long time after the product they're selling proves itself out.

An account manager hired into a 2-year-old sales team that has been making its quarterly numbers isn't going to be eased into commission comp.

Re: Why do we pay sales commissions?

#82

Post by tptacek »

davidbitton wrote: post #3

Our company does not have commissioned reps either, and frankly, I'm not complaining. Our sales figures are fine.

Does your company have direct sales reps at all?

A direct sales rep has a one-on-one relationship with individual named customers and works with a marketing team to target prospects directly, and spends perhaps weeks of time (over the course of a sales cycle) with each customer.

Re: Why do we pay sales commissions?

#83

Post by tptacek »

jacques_chester wrote: post #63
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.

Competent direct sales people choose that career because they are good at handling that risk and like the boost in compensation they get from it.

The guy who's content with the base salary is almost the definition of a sales account manager who isn't working out.

Re: Why do we pay sales commissions?

#84

Post by paulhauggis »

jacques_chester wrote: post #63
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.

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

I suppose. But without sales, they would be out of business. They take this risk on regardless of what they are paying their sales staff (Business is all about taking risk).

I wonder what percentage they were actually giving their sales staff..10%..20%? I doubt it was over 50%, so they aren't really increasing their risk by that much.

Re: Why do we pay sales commissions?

#85

Post by swombat »

AnonSales wrote: post #72
swombat wrote: post #56

Earlier quoted context omitted.

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 effec…

I don't mean it as condescending. Sales takes a lot of creativity and skill - but still, if you're hired by, say, Fogcreek software, to sell the Fogbugz product to enterprises, the product is known, the customer base is more or less clear, and the process to get them sold has probably been practiced hundreds of times before you're hired. There will always be unique quirks to every client, but compared to the levels of uncertainty of entrepreneurial sales, you could say that every sale is pretty much the same.

Making a sale still takes a lot of skill and effort - and, even more, it takes tenacity, and drive, and a very strong desire to actually close rather than spend months and months waiting for the client to make up their mind. Sure, you might lose some clients by pushing for the close (though with experience, you know which ones will respond to it), but at least it then frees up your time to pursue other prospects who can be sold more easily.

I don't think that makes salespeople inferior to programmers. These are two different kinds of jobs with two different sets of parameters. Programming is project-based work, where you aim somewhere and you go there and then you're done. Sales is process-based work, where you have an infinite pile of leads to go through (and if the leads run out, you go and generate more), and selling more today doesn't mean you sell have less to do tomorrow. I find the latter much more difficult to do.

To put a final nail in the idea that I look down on sales - both my girlfriend and my ex-girlfriend are salespeople. Not that that's why I dated them, or anything, but it'd be hard to be with them if I looked down on their profession ;-)

Re: Why do we pay sales commissions?

#86

Post by krallja »

d_meyer wrote: post #40

Atlassian (which also makes bug tracking software) has been around longer than Fog Creek, and doesn't even have salespeople, much less commissions. Demonstrated model of success, no need to blog about it in 2012.

From Wikipedia:

"Atlassian was founded in Sydney in 2002"

"Based in New York City, Fog Creek was founded in 2000"

Re: Why do we pay sales commissions?

#87

Post by masklinn »

AnonSales wrote: post #73
masklinn wrote: post #68

Earlier quoted context omitted.

> 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.

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

That definitely sounds like a recipe for disaster.

Re: Why do we pay sales commissions?

#88

Post by gamble »

The fundamental reason companies use commissions is because it shifts risk from the company to the employee. Companies that depend on salespeople tend to scale up with the number of feet you have on the ground. If you pay salaries, every employee increases your cost structure. If you depend on commissions, employees pay themselves or go hungry.

You can see this in an extreme form with car dealerships, where the salesmen are usually 100% commission. It's common for dealerships to have a half-dozen salesmen loitering on an empty lot, because they don't cost the dealership anything.

Re: Why do we pay sales commissions?

#89

Post by gamble »

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's a good philosophy to start from, but you can't have a career in sales without eventually being forced to push products that no reasonable person would believe in.

Perhaps I've been soured by the particular salespeople I've worked with, but I don't think it's a job that ethical or sane people thrive in long-term because there are eventually going to be situations where management expects results that can't be achieved without deceptive behaviour. Most of the successful salespeople I've known have been greedy, delusional, unethical, or borderline sociopaths. The really good salespeople are the ones that can hide it until a critical moment.

Re: Why do we pay sales commissions?

#90

Post by thekevan »

Sales guy and coding hobbyist here.

My snarky answer to this is if a software guy wants to get rid of commissions, he shouldn't complain when I client gives him a mock up in Word.

My serious answer is the problems his sales department had were symptoms of a broken system. Many easy, smaller fixes could have alleviated the boiler-room atmosphere he describes.

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