Salary vs. Commission - Impact on Performance

Does pay structure have an impact on sales performance? Do you believe a salesperson working on straight commission is more likely to outperform a counterpart working on straight salary? -SpeedRacer

I think so. I've seen guys work at one company on salary who had to leave because they werent' selling anything and then took a job at a competitor who paid commission and they did much better because they had to get out and sell or they didn't get squat. -Thomas

I can believe that the salesperson who chooses straight commission over a salaried position is more likely to outperform the salesperson who chooses the opposite. -AZBroker

Is that because they are more "focused" on getting results and are in a win : lose situation?

There is one factor that has continually stopped me going down the pure commission route in my career and that is the risk that the company you are selling for fails to deliver the product or service correctly and you dont get paid. In the technology business, there are always factors that can delay or even derail a sale completely that are out of your control as a salesperson, therefore we always work on a mixture of fee + commission.

Daewoo tried to work on salary only with no commssion in the UK - the result? They got much lower sales and were eventually bought by GM...lesson learned - sales people NEED commission! -Julian

In my experience what works best is base pay and bonus. Unless you sell commodities, selling is a complex issue nowadays it's hard to peg sales success on one single person. Especially not in B2B.

The commission structure alienates the sales force from the rest of the company. They no longer work for the company but for themselves, and by competing with each other. Loyalty is low and the only motivation is to sell so they make more money.

And what has the commission structure achieved over the years? After politicians, selling is the most disreputable profession and salespeople are some of the least trusted and respected people. QED: The general public hates them and does it's best to avoid them.

And even a large percentage of commissioned salespeople admit that they would never buy anything from the kind of salespeople they themselves are.

A survey by Sales and Marketing Management Magazine has found...

• 49% say their professions contributed to marital problem
• 44% say their professions contributed to for their failed relationships with colleagues and friends
• 18% say their professions preventing them from finding a spouse
• 72% say their professions prevent them from exercising.
• 69% say their professions undermined their health problems, like weight gain.

Cheers

Tom -Bald Dog

You want to pin that on commission structure? That's reaching IMO. -Jolly Roger

Partially yes. -Bald Dog

Would you care to elaborate? -Jolly Roger

Using a sports example, I wouldn't want to play in a soccer team where members are individually compensated based on how many goals they score.

Or using an example from my military past, I wouldn't want to lead a team where members are individually compensated based on how many enemy soldiers they shoot. Imagine, the radio operator (a vital function) gets nothing.

But there is an easy solution. The radio operator kills all his team mates and then can claim the glory and the reward all for himself.

What many companies don't realise that the commission structure creates fierce internal competition. You can't expect collaboration (teamwork) but reward competition. Top notch moron sales managers even organise sales competitions.

In today's world, selling involves multiple people both on the buying and selling sides. Rewarding one person for it is plain short-sighted.

Thoughts? -Bald Dog

Tom how would you suggest a car dealership pay their salespeople? Would you suggest a base salary plus bonus based on individual performance? How about team performance? Also, do you see any inherent problems with team compensation? -Calvin

Calvin,

I'm all for team compensation. In my experience, as long as there is a difference in compensation, people try to rig the system in their own favour and they work for promotions.

I look at the team as an immune system. No external intervention is required. Parts of the system will create justice for the system.

Team members maintain justice for team members. Slackers are to be punished... by fellow team members not an external manager.

In my consulting world "punishment" means hard labour at the local temp labour agency.

Team members become part of the team culture. Backstabbing culture attracts and creates backstabbers and repels good people. A culture of hard work, high morale, passion and enthusiasm attracts and creates people of hard work, high morale, passion and enthusiasm and repels slackers.

And the kicker is this. Same base pay for everyone and same bonus. That is, take people's eyes away from the money differences and let them perform at their best.

The creativity and effectiveness of our decisions are the function of the number of connections we can make between our brain cells. The more connections we make, the better the decisions we make. Now, let's say, for the sake of simplicity, you have four brain cells, so you can make maximum six connections. In isolation I can make the same six connections with my four brain cells. But together we can make 28 connections.

Here is a different explanation. I'm an ex farmer, so I love animal examples...

Chimpanzees have the largest brains among animals. They are individual geniuses. But their group IQ is basically idiotic. Baboons, on the other hand, have pretty low individual IQ but very high group IQ. Baboons are a great example of collaboration.

Total number of connections = (Number of brain cells * (Number of brain cells - 1)) / 2

It means the quality of our joint decisions is 366% higher than the decisions either of us can make in isolation.

So, if you have two salespeople each of whom sells $1 million worth of cars per year, working in a team they can sell $4.6 million worth of cars.

And these salespeople will have loyalty and commitment to the dealership and accountability to their team mates.

Calvin, this is not easy to implement. But when it's done, it's pretty amazing. Internal competition vanishes and team members focus on doing their best work and enjoy the process.

Every time I've ever walked into a car dealership, I could smell duplicity, backstabbing, greed and rivalry in the air. And people do that too. That's why buying a car is one of the most traumatic experiences... especially for women.

No. it attracts team player and repels prima donnas. But this is what we want, don't we?

Thoughts? -Bald Dog

IMO, there are several possible reasons why this happens. Yes, one reason could be the focus that develops in the sell or sink arena. Another possibility is the caliber of salesperson that is attracted to the straight commission versus the salaried environment. -AZBroker

But what I'm also hearing is that today's salesperson must be more "service" focused than merely "hitting quota" focused.

The salary allows people to focus on playing a great game. The commission makes people focus on watching the score board, which makes it hard to play even a good game. -Bald Dog

IMO, the salesperson that is attracted to the straight commission environment is more likely to be service focused than the salesperson who chooses the salaried environment. -AZBroker

I asked one of the top dogs about this and he said he would hire a team of assistants and pay them appropriately for the work they do but he wouldn't pay everyone on the team the same. -Thomas

Well, this is not a mainstream idea. Edison had to beg congress several times to let him install light bulbs for free. Congress kept turning his idea down.

The conventional wisdom in the corporate world is that a workplace must be competitive and somewhat cut-throat to enhance people's ambition.... yes, to succeed at their own colleagues' expense.

But I want the team to perform, not the individuals. E.g. Put together 10 Harvard top-notch MBAs, and they couldn't start up a business consulting firm even with a gun to their heads.

As the saying goes, if you chase two rabbits, you'll catch none (Believe me. I'm an ex-rabbit farmer, so this is first-hand experience for me). And that one rabbit is increased company-wide profitability.

Here is one advantage of paying the same. Everyone on the team is working towards one objective: Providing great service that maximises the company's profit. They know that the more the company makes, automatically, the more team members make. The better they collaborate, as opposed compete, with each other, the more money they generate for the company and for themselves.

But due to its collegial nature it's more suitable for women (natural collaborators) than men (natural competitors). And here comes my bias. Over the years, every time I've been hired to help to hire business development staff, I've never hired one single man, and probably never will. I've had my fair share of guys with inflated egos and this socialistic "entitlement" mindset: Pay me because I have a triple Ph.D. in rabbit chasing.

Women seem to be more practical and collaborative. And it seems to work. -Bald Dog

Professional athletes work as a team but they aren't all paid the same. Why should it be different in sales? -Thomas

McGregor's X and Y theory. Theory X says that people are lazy, lousy, and need whipping and cajoling.

Theory Y says people do their best because they're proud of hat they're doing.

I'm more for the theory Y approach witch specific consequences. I found it in the army that whatever I expected of people and demonstrated through my behaviour is what they lived up to. My behavior set the pace not the so-called rules.

Thougths? -Bald Dog

I don't understand those things but I was thinking about it and I think ALL professional sports teams pay each player differently and the team still functions great.

What about medicine? I don't think a general nurse should get the same pay as the specialized surgeon just because she's on the same surgical team. I don't think the team would function better because of it either. -Thomas

Just read the article at the link and see how you perceive people in general? What applies to your more strongly. Theory X or Y? We may have the difference here. I see the best in people until they prove me wrong. But I'm the minority.

They function great. Yes. What they are also missing is that how much better they could perform.

My thought is this: Which approach makes the most profitable clinic? (as opposed to the highest paid individuals) Without the general nurses' contribution the surgeon's work is useless. And vice versa. In this situation the client's received value lies not in the surgeon or the nurse, but the synergy of the team.

When I win a running competition, which of my body part takes the prize? Since the commission structure calls for one single winner.

If you have a chance to read Stephen Covey's "8th Habit," he talks about this quite extensively to avoid internal competition. -Bald Dog

So the whole world is wrong and you are right?

That analogy doesn't even make sense. -Thomas

It's not about being right or wrong. There are different objectives here. Profitable clinic vs. profitable individuals.

But what I've also found is that profitable clinics also create wealthy professionals.

In the last example I tried to illustrate organs and other bots and bobs work together as a team.

It's just a difference in perspective. Some people trace success back to the individual who "closed" the deal, and some others attribute success to the team that worked on the case. And if I want all my people to align behind the clinic's vision and strategy, I'd better eliminate individualism.
-Bald Dog

That article didn't say to pay everyone the same. :cu

If everyone on the team should be paid the same then the sales people should be paid the same as the owners. How does that make sense? :cu -Thomas

Not exactly. I only talks about other alternatives.

Essentially yes. Salespeople contribute to the firm's success just as the executives do. They just have different job descriptions. I would say the owner, for the risk she's taking for starting, running the business and the ultimate responsibilities, she has the right for double-dipping. But the competition vanishes among other people.

I've implemented this equal salary thing at over two dozens firms, and all of the sudden all the people felt responsible for the firm's success.

So, I don't say my approach is better than any other approach, but these firms have become more profitable as a result, and the people enjoy their work more than ever. So, if I compare this to the normal 43% annual attrition of salespeople, then I like what I've seen so far. -Bald Dog

What other solutions do you see for obtaining this type of responsibility from employees? -BossMan

Are there other ways Bald Dog? -Thomas

Can we really obtain a certain responsibility from people. They must agree to provide it.

I believe the key is to create a culture of responsibility. That's the owner's job. And a certain culture will attract certain employees regardless of money. this is why the US Army doesn't have recruitment problems although the pay is not so great. people want to belong to a something that is in alignment with their values.

In the 8th Habit Stephen Covey writes that employees work at 6 different levels...

1. Rebelling and quitting
2. Malicious obedience
3. Willing compliance
4. Cheerful co-operation
5. Heartfelt commitment
6. Creative excitement

Employees in most companies operate at levels of 1-3. A handful has level 4. Level 5 is almost exclusively reserved for the military, and level 6 is basically self-employment when you do what you love.

And I also believe we create the culture through our behaviour. I think the phrase "Practise what you perch is wrong." It more like "Preach what you practise." Practising comes first, and then we can expect others to follow. And most people simply can't pull this off. -Bald Dog

I think to attract and retain the best talent there must be an individual perfromance based aspect of the comp plan. Allowing the salesman to envision the direct impact on thier bank account in each sale is powerful stuff. And please don't pay me based on what other people do (team), unless I manage that team.

In any complex sale I think there also MUST be a salary component. During the valley's you don't want desperate salespeople. Straight commission seems intuitively more motivating, but the effects of a slump can mean a huge dip in effectiveness. I would not be at all surprised if the average tenure for salespeople in straight commission jobs is noticeably lower than other models.

For what it's worth, the last time I was recruited I ended up going with a company that paid about 1/2 the base salary of the competition because of a very lucrative back end. I think real performers will not shy away from a low base salary if the back end is right. Just give them enough salary to pay the taxes on the big checks!

Justyn -Justyn

Bullseye Justyn! ;co -Houston

How would this apply to a sales position like a manufacturers rep where the rep works alone? -Calvin

When a salesperson is condemned to work alone without any support from the company, it's a clear indication that he's working for a moron who doesn't have the brainpower to comprehend the power of working the salesperson as a part of a business development team.

I would do one of 2 things...

1) I would leave.

2) I would click over into broker mode...

I generate leads and close the leads. I negotiate and price the projects. Then when everything is lined up, I send an RFP to the company and 9 competitors. I select one as my subcontractor at competitive rates to do the work with the following conditions...

1. You identify yourself as my subcontractor, and do not hand out your business cards or any of your promotional materials and never talk about your personal business at any time.

2. You will do no promotion for your business at any time.

3. You perform the work as my subcontractor according mutually pre-agreed instructions, and do not agree to any altered, modified, or new conditions with the client. Any such client requests will be passed on to me for decision.

4. You will conduct yourself professionally, observe business ethics and courtesy, and meet the work requirements above. Failure to do so in the opinion of the client or me results in termination of the contract and the cancellation of your payment.

5. The name of the client never enters your database, and you have no right whatsoever to stay in touch with the client to solicit future business. All negotiation takes place between the client and me.

Hope it helps. I know this is hard ball but I have low tolerance level for idiotic employers. -Bald Dog

What are your thoughts about those salespeople who work best alone? -Calvin

The same as soldiers who say they work best alone. Useless. Even James Bond has a support team. Not to mention Secret Agent Bluebottle from the British comedy, The Goon Show.

Today's solutions are far too complex to be left for one person. Buyers also have multiple people involved in the decision making process.

ere is my reasoning behind the team approach...

Creativity, effectiveness and the quality of our decisions are the function of the number of connections we can make between our brain cells. The more connections we make, the better the decisions we make.

Now, let's say, for the sake of simplicity, you have four brain cells, so you can make maximum six connections. In isolation I can make the same six connections with my four brain cells. But together we can make 28 connections.

Here is a different explanation. I'm an ex farmer, so I love animal examples...

Chimpanzees have the largest brains among animals. They are individual geniuses. But their group IQ is basically idiotic. Baboons, on the other hand, have pretty low individual IQ but very high group IQ. Baboons are a great example of collaboration.

Total number of connections = (Number of brain cells * (Number of brain cells - 1)) / 2

It means the quality of our joint decisions is 366% higher than the decisions either of us can make in isolation. And this is just a team of two.

I believe the era of the lone wolf (as per Glengarry Glen Ross -> http://www.youtube.com/watch?v=TROhlThs9qY) ended in the last millennium. The exception is if we're selling simple commodity items.

Thoughts? -Bald Dog

IMO this is too black and white, too rigid. It also appears like "teams" are the "right" way and working as an individual is the "wrong" way.

Some solutions are too complex to be left for one person but what is the exception and what is the rule. Is car sales too complex? Is insurance sales too complex? Is consulting services too complex? Which solutions are too complex?

The potential of multiple people being involved in the decision making process has always been a factor. That hasn't changed. -Calvin

I think clients want to know the full picture. The car salesman can show and overall picture and then call the mechanic to explain the technical intricacies of the engine. Then call the detailer to educate the client how to properly clean the car.

I believe in many cases clients regard services as commodities because that's how the selling company treats them. Yes, I think car sales are complex. So is insurance and consulting sales.

Team vs. individual. Maybe my opinion is not even realistic. Starting from the military, I've worked in brilliant teams (as opposed to groups of individuals) over the years. Maybe that's why my personal preference is the team approach. -Bald Dog

My opinion is that general car sales isn't so complex that it is best handled by a team of specialists such as a salesman to facilitate the sale, a mechanic to explain technical intricacies of an engine or a detailer to educate the client on cleaning a car. A little cross-training at the dealership could go a long way in achieving a similar result. -Calvin

Calvin,

On the ground scale I agree with you. What rebels in me is the general public opinion that regards car salespeople the greatest scumbags on the face of the planet. There must be a reason why most people dread shopping for cars.

And to change this perception, the selling process ought to change. The current process is that of selling a commodity. That's why people haggle on cars.

Why can't car dealerships build a bit of an aura around cars by selling unique driving experiences. This may sound a bit Tom Peters-ish, but I also think it has value. After all, it's not what we sell but how we sell it that counts.

Thoughts? -Bald Dog

Before I became a CEO, I worked as a direct salesperson for companies with many different types of compensation plans. I made the most money when I was on straight commission.

When I went into several companies as sales manager or VP, I reworked their sales compensation plans to emphasize incentive pay. Every one of them resulted in dramatic sales increases. Those salespeople who could not keep up with the growth either were put into a non-sales job or left the company.

In my positions of sales manager, my own compensation was based on the total sales volume of the companies.

Two of the companies that I joined had a mixed sales force. About half of the salespeople were on the payroll; the other half were independent manufacturer’s reps. The Reps earned an average of 170% more than the direct salespeople. The Reps had to pay their own expenses, which amounted to about 25% of their total commissions. Therefore, they only netted about 90% more than the average of the direct salespeople.

When I got tired or running big companies, I became a manufacturer’s rep. -JacquesWerth

Most of the passenger cars I see on the road are very similar. Very homogenous. I think that this lack of perceived difference in quality or features is one of the main reasons why people haggle on cars. -Calvin

You're dead right. And it's the seller's responsibility to create a buying process (not merely the product) that is drastically different from the competitors' processes. But this takes time, effort and dough, and many companies are not willing to make the initial investment.

So, they keep playing the number's game of selling and subject themselves to the low haggling and objections. -Bald Dog

Bald Dog do you think it's possible to sell run of the mill Fords and Chevrolets for more money than other dealers in the area? What would you be paying extra for? -Seth

It's not about charging more for the commodity (the car). It's about offering various complementary professional services for buyers.
[*]Mechanical skills you must absolutely know before you start driving
[*]First aid and CPR skills for the big city driver (and at the back you can sell customised first aid packs with your logo on them)
[*]What parents of driving teens must absolutely know
[*]Learning the language of the car mechanic, so you can screen out the scumbags before they rip you off
[*]Etc.

I think, it's not what we sell but how we sell it that counts.

Could you do something similar? -Bald Dog

What kind of different processes and investment are you talking about? -Calvin

For instance, creating those workshops I mentioned in the previous message and marketing them well in advance using both off-line and the web.

I would also write a car buying guide as a lead generating tool. And create an email list and stay in touch with everyone who comes to the dealership.

There could be a owners only web section where car owners can track their mileage and service history. History adds to the resale value of the car, and staff can monitor when cars are due for servicing. I think it would have great added value to car owners.

Thoughts? -Bald Dog

I think setting up additional profit centers, lead generation tools and customer loyalty programs are all good ideas. Although I don't see how these ideas when put into action would change the haggling climate much. -Calvin

With the additional income stream who cares if they haggle on the low-margin commodity, if they buy high margin additional services.

Remember former IBM CEO, Lou Gerstner's words, "We sell comprehensive professional services and throw in some boxes for the hell of it." -Bald Dog

Oooh! Now I follow. Pretty smart. thmbp2; -Calvin

I think the problem is that we are limited by the conventional wisdom of our own industries. We too often say, "Our industry doesn't work that way!"

But we can make it work in any way. -Bald Dog

Kudos for thinking outside the box. thmbp2; -Calvin

If you check with the Manufacturers Agents National Association (MANA) you will find that the average sales agency has more than one sales Rep. The last time I looked, a long time ago, it was about three salespeople. The largest have about 20 Reps, but most have one or two.

The average earnings of the Rep/Owners is typically from two to four hundred thousand. The average earnings of the non-owners is from one to two hundred thousand. That might indicate that they tend to be more skilled than the average salesperson.

Reps are in their own businesses. They typically work on a straight commission basis. They typically represent several non-competitive manufacturers (principals). They work on a contract with each principal and they often loose those contracts if they don’t sell enough or if they sell too much.

That is quite different from working for one company. -JacquesWerth

This discussion reminds me of the time in the 1970s that I went into a publicly traded electronics manufacturer as the Sr. V.P., Sales & Marketing.

A month into the job I told my boss, the Exec. V.P., that I had designed a completely new sales compensation plan. It was radically different from the one that was in place for the previous 12 years. I asked him to review it before I put it into effect.

He said that he would not review the plan. He knew that it would probably increase sales and profitability. He also knew that, if it did not produce that result, that I would change it quickly so that it did have that affect. As it turned out, the first version of my plan was not very effective. Therefore, I kept modifying it until it was effective.

He was right on both counts.

I have run nine sales forces. Each one had a different sales compensation plan. Our company has provided sales compensation consulting to dozens of client companies. Every company has a host of variables that affect their sales compensation strategies. That mitigates against a one-size-fits-all strategy. However, as in the case cited above, a really good sales manager can make almost any plan work. -JacquesWerth

Absolutely It does, I see sales team strive harder when they need to work for it. -Wowsap

> And please don't pay me based on what other people do (team), unless I manage that team.

The question is whether or not you have the skills to lead a team. Most salespeople don’t. Leading a team is a different skill set. That’s why team people usually don’t perform well individually. And I don’t think I’m the only example.

A team of 3 people can outperform 3 individuals by the factor of 11.

So, the 3 $1 million producer produces $3 million.

The 3 $500,000 producer in a team formation can produce $5.5 million. And even if I pay $1.5 million to the 3 people, we still have $4 million left in the kitty. And of course a team is less costly to operate than 3 individuals.

I don’t deny it, I may suck as a salesperson, but as an engineer, I understand numbers. And in the army I learnt how to put together and lead a peak-performing team. So, I'm biased.

So, this is probably the reason why I don’t care much about individual performance.

If I worked as that manufacturer’s rep, I would sell the smaller deals, but broker the larger deals. Especially if I’m on full commission, there is no loyalty involved. Since the company is not loyal to me, I don’t have to be loyal to the company. I become a broker between the company and the client, but don’t allow the company to have direct access to the client. Basically I serve the client through the company’s stuff. -Bald Dog

I agree with Bald Dog, in principle. However, in practice it difficult to make team selling perform up its potential. The functional responsibilities of each team member must be specified. Then, someone who has the right background and capabilities for that function must fill each of those positions.

It also requires specialized training for each team member, cross training, and a customized CRM system to facilitate shared information and track all commitments.

Most importantly, it requires complete active support by top management. -JacquesWerth

In My Opinion yes - if there is a structures commision payment method that indicated unless you were a good performer (hitting target) you got a simple wage - I believe a lot more sales people would hit target/ -SexSells

> I agree with Bald Dog, in principle. However, in practice it difficult to make team selling perform up its potential.

I think it’s the commission structure that undermines teamwork. It the euphemism for encouraging internal competition.

> The functional responsibilities of each team member must be specified. Then, someone who has the right background and capabilities for that function must fill each of those positions.

Not to mentioned that in a team we need people with the right talents and character, not merely skills.

Here I like using a horse example.

When it comes to selecting horses for a team, it requires huge experience. But when it comes to selecting 5 horses for a so-called "Puszta 5" formation, used by the horse people in Hungary, and one of the most spectacular displays of horsemanship, this is probably the pinnacle of understanding horses and horse psychology.

Why?

In the Puszta 5 formation there are three horses at the front, two horses at the rear, and the driver stands on the backs of the two rear horses. The rein is between the driver and the individual horses, and is used to set the direction of the team. And it’s kept pretty loose. But there is no harness on the horses. Actually there is no physical connection between the horses, and the driver has no communication with individual “team” members. The only thing that keeps the horses in formation is their character and discipline. And the Puszta 5 driver never uses a whip. He keeps a very loose control and relies on the horses to operate as a team and do what has to be done to get from A to B.

Business development is the same. You either hire an army of prima donnas and spend your life trying to control and keep them on track and on purpose, hoping that at least some of them pull the corporate cart in the right direction. Or you hire a few highly disciplined people of the right character and you can basically let them loose. They don’t need constant checking and controlling and also keep the company’s interest in mind. Why the company’s interest and not their own individual interest? Wealthy companies with healthy cultures keep their people wealthy. But just because the salespeople make good money doesn’t mean the company is doing well. I know there are some wealthy companies with poor people, but this is caused by a crappy culture.

> It also requires specialized training for each team member, cross training, and a customized CRM system to facilitate shared information and track all commitments.

And all this can be provided if the company is willing to invest.

> Most importantly, it requires complete active support by top management.

In most cases this is what’s missing.

What I've done with companies where there is a separate sales force is that I request 50% of all revenue to come to the business development team, and we run our own budget.

My belief is that without it's own budget a team is not a team.

Our strategy is congruent with the company's overall strategy and we don't ask for funding.

50% is to land the client and 50% is to serve the client. It's only fair.

And a percentage of this 50% becomes the compensation to the bus. dev. team. The rest is recycled into the business development team's budget for other purposes. The top dogs have no right to bark for we've earned this money.

This may sound harsh but in many companies bus. dev. people are treated like dirt. And that's unacceptable considering that they keep the company in business.

It’s time for dinner.

Cheers -Bald Dog

That is an excellent depiction of team selling done right.

It looks like the basis for a good book. -JacquesWerth