Once a year, each business thinks about bonus allocation & commission payments. This is also the time when many sales executives think about new ways to structure sales compensation and incentive packages so that the sales teams can deliver on the lofty targets that the company might have set forth for itself in the year ahead.
There are many indisputable facts in life one cannot argue with such as the supremely elegant Newton’s first law which states that an object either remains at rest or continues to move at a constant velocity, unless acted upon by an external force. Can’t argue with that. It’s common sense.
Similarly, we do not question where the Sun rises and sets any more.
The third incontestable fact is that “Salespeople are best encouraged only by commissions”. I mean they must be since this is how we have been structuring sales since the medieval days. Notice I used the word “medieval” because that’s exactly what it is. The reason we pay sales reps a commission is because the concept is entrenched more in belief and folklore than in raw logic. I mean this annual drill is so paved with canon & convention that it’s not even an actual choice any more. While meeting clients from all kinds of industries, I learnt that some of them have started questioning this ancient tradition of motivation by commission, and are uncovering that commissions can in some circumstances be even detrimental to the business and to the rep and that doing away with them altogether can open the doors to higher earnings and happier employees.
This may all appear a bit like going against basic human instincts, but there has been abundant scientific research conducted over the decades that supports these claims. In fact, Professor of Psychology Adam Grant from my alma mater Wharton as well as leading innovators in the field from the University of Rochester Edward Deci and Richard Ryan have written extensively about human motivation in different life situations and enunciated a more delicate approach to the topic altogether compared to offering a conditional bounty.
Professor Grant’s research focuses on generosity, motivation and meaningful work, championing new ideas, personality traits like introversion-extraversion, and leadership, collaboration, culture, and organizational change. His pioneering research has introduced evidence-based techniques that increase performance and reduce burnout among sales professionals and enhance overall sales productivity.
These academics have discovered that the efficacy of incentives fluctuates with the job. Specifically, they have determined that conditional bounty i.e. “If you deliver $x of sales or accomplish such a task, then you will get $y in commission” is effective when the duties being undertaken are mundane or almost mechanical. These researchers even have a word for it – algorithmic. Per them, if you were folding flyers, packing 500 lunch boxes with the same produce or turning a screw clockwise all day in a factory, then such a carrot in the form of a cash incentive will likely get us quite motivated to get the task completed on time and accurately.
However, for tasks that are heuristic in nature, involving a high degree of creativity, complexity or out of the box thinking (such as sales or product development to name a couple), the conditional commissions have proven to be substantially less effectual. Not only sales but also many other white-collar jobs where one might be creating a new product, trying to solve a problem with the help of others or any such work where a wider viewpoint is crucial, the research proves that conditional if-then commissions are just not that effective.
So, let’s get back to sales. Back in the day when Shakespeare was writing the Merchant of Venice, sales was probably not terribly complicated. I think it might have even been pretty one-dimensional – salesman shows up with a script, hopefully commits it to memory, opens his “wares” for the world, responds to questions or concerns with scripted answers he has memorized, then rinse and repeats the job the following day all over again until sales start to trickle in – the law of averages, the principle that supposes most future events to be likely to balance any past deviation from a presumed average, working at its best in support of the salesman.
As in the above case, back in the day, sales might have been primarily transactional, mundane and repetitive in nature. That’s certainly not the case anymore. Anything routine now automatically gets automated what with all the tech improvements we have had over the decades. What happens with automation – the collected data is accessible not only by the salesman but also by the prospective customer making things interesting. In such cases, it is the salesperson’s empirical talents that bear the most value. In this context, such skills might involve the interpretation of the data as opposed to just providing it, the resolution of complications while identifying new ones and most importantly offering knowledge, solutions, insights and a vision, instead of merely peddling a product.
For many industries, the standard sales plan is a 60% base salary with 40% commissions. Should we perhaps consider a new simpler plan, that of giving salespeople 90% of their comp as a flat base salary with the other 10% associated with company (but not individual) achievements, for example growth in top line revenue, EBITDA, net profits, and EPS. Companies that have implemented such a system claim some remarkably positive changes in outcomes, such as increase in total sales while keeping a flat cost of sales with higher sales rep retention and lower attrition. Among the list of such companies are Microchip Technology a $19.3 billion public company, Thoughtworks a software company based in Chicago, Hunt Big Sales a consulting firm based in Indianapolis, New York Label & Box Works a 139 year old packaging services firm, and Red Gate Software in Cambridge England.
Even Pharmaceutical giant GlaxoSmithKline joined the no incentive society, removing commissions from the comp packages of its pharmaceutical sales reps in over 150 countries worldwide. I find this quite revolutionary because GSK salespeople are not paid bonuses based on the volume of prescriptions they convince their doctors to write but instead their bonuses are based on product understanding, business wisdom and complete comprehension of the needs of patients and physicians. How refreshing indeed. I am sure this effort eliminated the pressure GSK sales people may have felt to persuade doctors into writing prescriptions that often led to some unfitting marketing practices anyway.
I am not saying every company should retire sales commissions. Every job, company and industry is unique. All I am asking is for us to challenge the convention and appreciate that we are living and working in a highly sophisticated and technologically advanced period in our society where the “sales” function is complex creative work and the sales people selling your products or services consequently deserve a form of motivation that ventures beyond that of a hanging bag of cash.