
Eliminating Sales Commissions - ABS
http://martinfowler.com/articles/eliminatingSalesCommissions/
======
BlackJack
Why don't people incentivize long term sales? For example, instead of giving a
commission based on how much they sold in a given year, have each salesperson
given some money based on how many years a client has remained with the
company, and maybe extra if the client buys more products later on. That way
you're incentivizing sales people to build long-lasting relationships, which I
assume is what you want.

~~~
faet
The way my company does it is X% of total sales from Customer A the first
year. Followed by Y% for next couple years.

------
MattRogish
FogCreek has eliminated commissions, too. <http://blog.fogcreek.com/why-do-we-
pay-sales-commissions/>

So have we.

My thoughts? Commission-based sales is almost never a good alignment between
sales people and the company. Almost always sets up unintended consequences
and leads to local maxima before reaching global optmima.

Also, if you're a software product company, you end up with the "doers"
(software people, support, etc.) earning far, far less than sales-people,
which causes them to get fed up and leave.

Yes, we're a business and we have to make money, but without great software
developers we won't have anything to sell.

Put everyone on salary and then have company-wide profit sharing (that is
equal amongst the divisions/people) tends to align everyone's interests.

~~~
orangethirty
_Also, if you're a software product company, you end up with the "doers"
(software people, support, etc.) earning far, far less than sales-people,
which causes them to get fed up and leave._

I don't understand this point. The sales person is the one making sure
everyone else gets a paycheck. Why should they be treated equally? They are
the stars of the show, not the developers, or management. If people get fed
up, then let them. Code does not sell itself.

~~~
sgift
There are many software companies selling software without dedicated sales
people. There is not one which has sales, but no developers to build the
product.

~~~
GFischer
"There is not one with sales, but no developers to build the product"

I wish. You've never sold software to the state then... I've seen a lot of
vaporware being sold (and if they win the bid, then they scramble to get the
lowest common denominator made).

------
jmduke
So, my takeaway from the article:

Sales commissions are good because they align what the company wants and what
the salesperson wants.

Sales commissions are bad because sometimes the company wants something
(pushing a harder product, etc.) that isn't in the salesperson's best
interest.

ThoughtWorks' solution was to eliminate commissions, thus pushing for a
salesperson role that was less of an advocate for the product towards the
customer and more for an advocate for the customer towards the company.

Maybe I'm oversimplifying things, but the sales staff the author describes
isn't sales -- it's marketing. Which is good! But fills an entirely different
niche. One of the issues the author talks about is that the sales staff were
promising things that couldn't be delivered, but I only see that more
exacerbated by this approach.

What's the disadvantage of scaling commission based off of company goals?
(Selling a less demanded product yields more commission). This is, from my
understanding, how more institutionalized salesforces operate, and seems like
a more gradual solution to the problem.

~~~
mindcrime
_Maybe I'm oversimplifying things, but the sales staff the author describes
isn't sales -- it's marketing._

I don't think there's any maybe too it. I think it's quite clear that the OP
isn't suggesting to abandon sales completely in favour of marketing. So, yes,
I think you're oversimplifying to a strong extent.

What is being discussed is all about incentives for sales people, to motivate
them to do what's in the company's best interests. If it were in the company's
best interest to simply get a sale no matter what, regardless of how much
damage that sale does to the company, then the standard commission based
approach makes perfect sense. But what do you do about the deals where the
salesperson does the normal "used car salesman / snake oil pitchman" act,
scores the sell by promising a lot of shit that's not realistic, and then it
ultimately costs the company more money than the sale price, to fulfil the
deal?

Or maybe it's not _that_ bad, but maybe the scenario just creates a debacle
that leaves a bad taste in the customer's mouth and ixnay's any future deals
with that customer. And if your firm emphasizes lots of up-selling and cross-
selling and tries to optimize "lifetime value of the customer" then you want
to start the relationship off on a strong note, no?

~~~
jmduke
_What is being discussed is all about incentives for sales people, to motivate
them to do what's in the company's best interests. If it were in the company's
best interest to simply get a sale no matter what, regardless of how much
damage that sale does to the company, then the standard commission based
approach makes perfect sense. But what do you do about the deals where the
salesperson does the normal "used car salesman / snake oil pitchman" act,
scores the sell by promising a lot of shit that's not realistic, and then it
ultimately costs the company more money than the sale price, to fulfil the
deal?_

This argument isn't against sales commissions, it's against bad salespeople.
Obviously any sales approach that values get-rich-quick over providing long-
term value for the company is going to be dangerous. Smart salespeople
recognize that a relationship with the customer is the most important thing --
not despite commissions, but because of commissions. There's a sales cliche
that goes along the lines of treating the customer like a cow to be milked
instead of a cow to be slaughtered: if you're trying to optimize the lifetime
value of a customer as a business, then that also means maximizing the
possible commission from that customer, no?

(And, furthermore, the point I'm raising is -- are those smart/good
salespeople going to be disinclined to work at a company without commission? I
really don't know.)

~~~
mindcrime
_This argument isn't against sales commissions, it's against bad salespeople._

OK, I can buy that, but I think it's creating more of a binary situation than
exists in reality. Surely the "goodness" or "badness" of salespeople, in this
regard, is on a continuum? If so, wouldn't choosing the best incentive
structure be most important to the ones who aren't solidly at one end or the
other?

~~~
jmduke
Oh, definitely. It's just hard to mentally conjure a spectrum of fitness for
the company without having more specifics.

I guess in my mind, what the author is doing is creating a structure that
minimizes damage done to the company by bad salespeople: and I wonder if an
unintended consequence of that is limiting the abilities of great salespeople
as well.

------
jpdoctor
Please please do 1,2,&3 year followup posts. Interesting experiment, I'm
pessimistic as to the outcome, but would enjoy being wrong.

~~~
willlll
Why are you posting this message here? This site is not his site. This isn't
his email inbox.

~~~
manojlds
And, he did not submit it on HN, but someone else did.

------
orangethirty
There are two types of salespeople: A. Those who can and will sell with
motivation to make good money. B. Those who want a steady paycheck and will
sell OK. Your approach values option B. Is it bad? Not really. OK sales people
still make sales. But they tend to have very negative impact on the rest of
the business. I only hire sales people on commission, and pay them very well.
They always bring twice as much business as a salaried one.

~~~
ncallaway
In your penultimate sentence you state you only hire sales people based on
commission. In your final sentence you state that they perform twice as well
as salaried sales people.

These seem contradictory to me. How can you know the latter given the former?
Where do your stats for the comparison cone from?

Sorry if I'm being terse, I'm on my mobile at at moment...

~~~
orangethirty
I have run A/B tests with salaried VS commission. Not a perfect test, I must
say, because I can't test the same hypothesis on the same person. Best I can
do is test on two groups and keep most factors similar. Testing people is
difficult and expensive.

------
TWAndrews
I would love to see this become the norm for companies who sell enterprise
software.

~~~
mindcrime
FWIW, we don't have salespeople yet at Fogbeam Labs, but I'm leaning very
heavily towards the idea of adopting a Fog Creek / Thoughtworks approach when
we get to that point. I tend to think that going salary + regional bonuses +
companywide profit sharing (or something along those lines) is more compatible
with taking a long-term view and ultimately generating the most profit.

Now time might ultimately prove me wrong, but it is encouraging to see other
firms exploring this approach.

~~~
TWAndrews
My suspicion is that this model will prevent you from attracting the very best
reps, but that you'll be able to get a disproportionately high share of above
average reps, and that your turn over will be a lot lower.

In any case, it's much easier to try this model and then add in commissions
later on than to do the reverse.

------
trimbo
I like to say "money begets money".

If the incentive is money, people make more money. If it's not, they don't.
It's that simple. Everything money related works this way for a reason. Sales,
real estate, trading, mortgages, whatever.

And I am pretty sure that no one wants their sales team to make less money,
right?

What you're _really_ looking for by eliminating commissions is discipline. Not
selling the product in a way that puts you under (like Oracle nearly did in
1990-ish[1]). That requires a strong leader to guide this, not changing the
core incentive AWAY from making money. Oracle fixed their problem by changing
their accounting.

I'm not a sales person, but my understanding from sales people is that the
best ones work on commission. If you were told that the best engineers
required equity, would you make your company equity-free? Didn't think so.

[1] -
[http://en.wikipedia.org/wiki/Oracle_Corporation#Sales_practi...](http://en.wikipedia.org/wiki/Oracle_Corporation#Sales_practices)

------
jonathanjaeger
I don't think the issue is black and white. Take for instance a company where
your big money comes from landing big accounts, and the only way to do that is
with star sales people. And maybe on the tech side the work is rather mundane,
and star engineers don't even want to work for the company -- for example,
simple landing page setup or setting Javascript pixels to track conversion and
other metrics.

For software intensive companies where the product is the business, perhaps
sales commissions don't make sense. But there are many companies where tech is
either outsourced or not the differentiator in terms of competitive advantage,
and therefore salaries/commissions skew towards the salespeople making the
most. There are certainly issues that can crop up in that case, but the
incentives can help.

------
louischatriot
Sales commissions are the best way to maximize short term returns. Then your
operational teams leave because they're paid much less but don't see why their
work is less important, your clients leave when they understand the solution
you sold them is not adapted and so on.

Tldr of the article:
[http://tldr.io/tldrs/512258d5ace532876b000003/eliminating-
sa...](http://tldr.io/tldrs/512258d5ace532876b000003/eliminating-sales-
commissions)

~~~
jasonw44
I think that salesmen always have gimmicks. Often, the best way to sell a
product is to lie. Also having a sliding commission scale gives incentives to
push sales through at whatever cost, just to get to the next tier of
commission-- the difference is substantial. I've seen how this can lead
salesmen to sell to fraudulent clients who use demo service or products (at a
cost to the company) Reducing or eliminating tiered commissions can help. If
possible, applying penalties to salesmen who don't conduct due diligence to
verify clients' identities, or penalties for cancelling a service before
rescission periods end could help, too.

Yet, at the same time, I'm making a switch from tech to entrepreneur and I
believe that sales is a lot about telling a story. In general, you have to
make your clients believe your product or service is a great deal and that you
don't make any money on the deal. (which is impossible)

So, how do you sell a product or service at a decent profit without becoming
slimy? Or how do you run a company and give incentives (and disincentives) to
employees that lead to both short and long term growth, customer satisfaction,
employee satisfaction and sustainable profit?

Good question. I've come to believe the answer isn't a one size fits all. Most
businesses (especially tech businesses) are businesses of scale. Short-term
growth is especially important in the beginning of a company, but sustainable
growth is the ultimate goal.

------
jasonlotito
Equating sales and sales commissions as the same across different fields is
dangerous. Even across different companies.

For example, the traditional relationship is between the companies and the
sales person representing that company. This is because the relationship is,
in reality, between two individuals. This happens all the time in the startup
world, we just don't call it commissions.

------
armored_mammal
Just thinking about the author bringing up metrics and aligning motivation, it
might be possible do both across multiple departments by having moderate
bonuses based on customer retention and satisfaction. (I guess that's similar
to profit sharing, in a way.)

 _edit:_ realized I'm not the first to suggest something similar. Haha.

------
larrik
Anecdotally, a company I used to work for actually went the opposite
direction, moving from purely salaried salesreps to pure commission. I believe
it was a disaster (the reporting was so bad back then there was no way to
tell), but salary costs went down, so they just kept it.

Yeah, weird place.

------
briandoll
We're really happy not having sales commissions at GitHub.

Further reading: Optimizing Sales for Happiness
<https://github.com/blog/1230-optimizing-sales-for-happiness>

------
gadders
I can't read the article as I'm in corporate lockdown IE8 hell, but one point
that may or may not be in the original:

I always thought that salespeople were paid well was because, fundamentally,
it's a _shitty_ job.

~~~
qxf2
Totally agree. The emotional variance a salesperson has to endure on a day to
day basis is very, very high. We engineers are lucky to work in a rational
space. When things work, they work. When things don't work we can apply
rational thought and fix the problem a majority of the time. You can deal with
emotional/people issues via straight talk, through your manager, avoidance
and/or just quitting. With sales and marketing, they are grappling with a
fundamentally irrational (or at least opaque) set of constraints - people,
their moods, budget cycles, company processes, etc. Its hard.

I used to think sales and marketing was at par or below engineering. My
thinking changed over the years thanks to something I saw first hand. My
previous employer had a large, all hands on deck, one week long conference
every year. As an engineer I would observe how our sales team would interact
with clients. Clients, especially the bigger ones, would treat them very
badly. Our sales members would put on a cheerful face and continue with their
jobs. I would have walked out if I had been treated like that in public. I can
only imagine how bad the treatment is when its in private. I've been much more
polite to salespeople, even to pushy salespeople, ever since then. I actually
take time to reply to (generic) emails for products that I signed up for a
trial offer.

~~~
freework
It depends on the person. Some people take to "human problems" very well.

------
bane
In my last company we operated for years without commissions. But our sales
were never really quite paying the bills. But because of how we sold our
software, we ended up building very long reaching and substantial
relationships with our customers. Quite a few are still very loyal customers
today, almost a decade later. _Everybody_ was a sales person.

Still we couldn't _quite_ get over the hump to profitable and growing.

For a few years we had a professional sales guy who handled a number of
clients. He was paid like everybody else, base salary plus bonuses. However,
he always felt uncomfortable not getting a base + commission like he was used
to. One thing that was noted was the "drive by" approach to sales he used.
Customer interaction was fairly limited, relationship building was minimal,
meetings of any sort were kept on strict time schedules (and no longer than 1
hour).

This ran counter to how the rest of us moved software. He did "ok" compared to
the rest of us in short term sales, but not a single one of his customers
stayed on as long term customers.

Enter a new CEO, he brought in a professional sales team, and restructured the
sales operation to a base + commission model. Very quickly one problem became
very apparent. The hours worked on a sale by the a sales guy were quickly
dwarfed by the hours worked by the rest of the staff to support him. But when
the sale was made, he kept the entire commission.

This became a really big problem as the new sales guys would start new custom
demo building efforts without regard to how much time it took the rest of the
staff to support him. To him, his 2 or 3 1-hour meetings, a half dozen emails
and a phone call or two didn't change if the demo took 8 hours to put together
or 120.

Sales were also still not up-to-par. The sales team blamed the lack of
support, the support team resented the flippant treatment by sales. Something
had to give.

The new CEO was absolutely opposed to getting rid of commission entirely, he
felt that it would limit his ability to recruit new sales talent. So I
proposed a middle ground:

\- any designated sales person "owned" their account and were guaranteed some
money out of a deal closing

\- if he made the sale completely, 100% on his own, he kept 100% of the
commission. This was to encourage them to start respecting how much work went
into the support he received and for them to better learn the product line
they were pushing (we had a problem where every salesman needed a support
engineer in every sales meeting to answer 80% of the questions the customer
posed)

\- if he required even 5 minutes of anybody else's time, he lost 40% of this
commission, to be paid to the person who helped him. This was to encourage the
sales staff to collaborate and get the most out of their support person, and
to encourage the support person to collaborate with the sales guy --
effectively reintroducing the "everybody is a salesperson" back into the
company

\- if more than one person had to help, the 40% was split between those
people, this again further encouraged collaboration, skill building (so the
support person wouldn't have to rope in additional colleagues) and the need
for the requesting sales person to actually learn about the functions needed
to support his sales effort and who had those skills

In the end, the sales guy, rather than being a brash, drive by, finger
pointing irritant to the company -- rewarded for everybody else's work -- had
to learn to lead micro-teams for each sales effort, or learn the products back
and forth and serve themselves.

The results:

\- small sales efforts ended up being handled solo, the sales guys started to
get really good at estimating LoE for a sale. One guy ended up specializing in
these and handed off larger sales to the rest of the sales team as he didn't
want to coordinate people...he kept selling so it was fine

\- larger LoEs automatically pulled in a few core people who ended up more or
less as sales engineers for the sales staff, we became much more careful about
sizing sales vs. LoE so we didn't waste now 2 or 3 people's time

\- support staff loved getting extra checks every quarter, motivation was up
and resentment was down

\- sales guys became much more part of the team than slick lone-wolfs

sales were up record percentages

What went wrong?

When more than one support staff worked on a sale, it became unclear how to
split the 40% at times.

There were still sales where the support work dwarfed the sales guy's work,
and/or times when the sales guys thought they could game the system by
delegating virtually all of the sales process to a support person, then
collect their 60% for virtually no work (this happened under the old system
when they made 100% too) the 60/40 split didn't always make everybody happy.

It introduced quite a bit of complexity into the sales process. Pre-
commission, we were free to just focus on the sales process, post-commission
there was endless negotiations over commission splits, payout times, etc.

If I _had_ to do it over again, I make the rules this way.

Sales people would be payed a normal competitive salary, no commissions until
they've at least covered their own cost to the company, then commission pay
outs as before.

Actually, I'd still setup a commission-free system, but with generous bonuses
to outstanding members of the team.

------
martinced
The problem is always the same with commissions, anywhere: kickbacks ("retro-
commission" in french).

It _does_ definitely happen in the software industry. You find someone
responsible for acquisitions and you tell them: _"Look man, if you buy 200
licences of this I'll get a commission and I'll give you under the table a
kickback of 25% of my commission"_. You're a fool if you think this doesn't
happen and there are some _very_ famous names in this industry where sales
people are known to behave this way.

The good move is to completely suppress them but the problem is that your
competitors may be employing sales people using shaddy practices so you'll,
sadly, all too often not be competing on merits.

