Four Reasons To Avoid Paying Straight Commission
Question: We are intent on revising our decades-old sales compensation plan. Management is divided. One half favors straight commission, and the other doesn’t. What are your thoughts?
Answer: In my work as a sales consultant, I am routinely involved in helping my clients revise their sales compensation plans. My company, on almost any day of the week, has an open compensation plan project on which we are working on for some client.
I say that to let you know that I have extensive experience with sales force compensation plans. The ideas that I am going to share with you arise out of this extensive experience.
Let’s make sure we are using the same language. I use the term straight commission to mean the kind of compensation that pays the salesperson only for making a sale. The salesperson receives no salary or wage other than commissions.
In my career as a salesperson, I loved straight commission and eventually came to the position that I wouldn’t work on any other plan. In my experience as a sales consultant, I’ve changed that opinion.
Now, in most circumstances, I don’t recommend straight commission plans and there are a number of reasons why.
First, strategically, 100 percent commission plans make no provision for the difference between acquiring new business and maintaining old business. It is always much easier to maintain old business than it is to acquire new business. As a result, if you are in the kind of business where your customers buy from you over and over again, the salesperson becomes unfairly compensated for maintaining business, and under compensated for acquiring new business.
The net result? Your sales person does what is easiest, and that is to call on the same customers and sell the same things, and your new account acquisition becomes a constant problem.
Second, 100 percent commission plans rarely offer an opportunity for the company to gain sales productivity. Again, I need to define my terms. Sales productivity is defined as the cost to acquire a certain amount of gross profit. For example, if you pay the sales person 15 percent of the gross profit, your sales productivity will remain forever fixed at 15 percent. Your sales productivity will never improve.
I don’t think that is an acceptable situation in any other aspect of your business. Aren’t you always trying to improve the productivity of your warehouse, for example? Aren’t you investing in new computer capability to improve the productivity of the customer service and data entry people? Aren’t you trying to become a leaner organization so that you improve the productivity of your management?
In this kind of environment, why would you exempt one class of employees from the need to become more productive?
Third, 100 percent commission programs promote a lack of directability among the sales people. Directability means that the salespeople can generally be expected to do what you direct them to do. When salespeople are paid only by commissions, they believe that their commissions are the only thing about which they need to worry. You can ask them to focus on certain products, certain customers, certain anything, and you can expect that only the rare few will do what you want them to do. Rather, they will do what gets them the easiest commissions.
In today’s rapidly changing economic environment, I believe that you must have a highly directable sales force as a strategic asset.
Fourth, 100 percent commission programs are based on certain misconceptions. One is that the sales force is highly entrepreneurial and will look on their sales territories as their own business, generally making the right decisions to build their business. While this may have been true a decade or two ago, I believe it is rarely true today. Based on interviews with thousands of sales people, I believe that most sales people today would trade their "business" for a sure income (salary). Money is not the motivator for this generation of sales people that it was for the Baby Boomers.
The second misconception is that 100 percent commission programs motivate people to continually sell more. Again, that sounds good for the Baby Boomers who are making the compensation decisions, but it isn't realistic for the sales people who are living with those decisions. Again, from my experience, most salespeople are not motivated to sell ever more. Rather, the 100 percent commission programs motivate them to sell until their income level reaches their comfortable image of themselves, and then to plateau and work less hard for the same money.
Now I realize that there are those reading this that strongly object to my observations based on their personal experience. I understand that there are highly motivated professional salespeople about whom the above statements would not apply. There are always exceptions. Those highly motivated exceptions to the observations are just that — exceptions. They represent about 5 percent of the sales force. It’s the other 95 percent to which my observations apply.
Dave Kahle is one of the world’s leading sales authorities. He’s written 12 books, presented in 47 states and 10 countries, and has trained tens of thousands of salespeople and sales leaders. He can be reached at email@example.com. Visit www.davekahle.com for more information or sign up for his weekly Ezine.
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