Why Straight Commission Plans Don’t Work
Question: We have had a 100 percent commission sales compensation plan for decades. It has become an issue recently. Should we continue with straight commission, or should we do something else?
Answer: You’ve asked one of those questions that probably is somewhere in the minds of almost every jan/san CSO. It is a question with which I am very familiar. In my work as a sales consultant, I routinely help my clients refine highly effective sales systems. One major part of a sales system is the compensation plan. We have helped dozens of clients revise their sales compensation plans; it has become a core competency.
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.
In my career as a salesperson, I loved straight commission; I wouldn’t work on any other plan. In my experience as a sales consultant, however, I’ve changed my opinion.
In most circumstances, I don’t recommend straight commission plans.
Before we go any further, let’s define our terms. I use the term straight commission to mean the kind of compensation plan that pays the salesperson only for the sale. The salesperson receives no salary or wage other than commissions.
There are a number of reasons why I have evolved to this point.
First, straight commission plans are based on this paradigm: All salespeople will be forever motivated to make more money. While that may have been more true for the previous generation, it is rarely true today. The truth is that some (maybe about 5 percent) of the salespeople will be forever motivated to make more money. The vast majority will work up to their economic comfort level and then plateau. After that, straight commission programs just support the status quo. The fundamental paradigm on which they are based is flawed.
Second, 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, the salesperson becomes unfairly compensated for maintaining business, and under compensated for acquiring new business.
The net result? Your salesperson 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. (See last month’s column on ‘comfort zones.’)
Third, 100 percent commission plans rarely offer an opportunity for the company to improve sales productivity. Sales productivity is defined as the cost to acquire a certain amount of gross profit. If you pay the salesperson 15 percent of the gross profit, for example, your sales productivity will remain forever fixed at 15 percent. Your sales productivity will never improve.
At some point, that inability to improve productivity will rise up and bite you. In today’s world, you would not accept flat productivity from other aspects of your business. Aren’t you always trying to improve the productivity of your warehouse, for example? Aren’t you investing in new computer capabilities 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? To exempt one class of employees from the need to become more productive doesn’t portend well for the future of your company.
Next, and maybe most importantly, 100 percent commission programs promote a lack of directability among the salespeople. 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. You pay them for one thing, and you ask them to do something else. No wonder you are frustrated.
In today’s rapidly changing economic environment, a highly directable sales force is a necessity.
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.
Having said all that, now let me paint the other side of the picture. There is a place for 100 percent commission programs. Straight commission programs are often appropriate for new salespeople, (probably softened a bit with draw) to motivate them to sell up to a certain level. Straight commission programs are often appropriate for big new markets where you have almost no business.
Finally, one of the reasons 100 percent commission programs have been so ubiquitous is that, formerly, sales or gross profit was about the only thing we could easily measure. With the growing sophistication of our IT systems, now we can measure sales performance far more precisely than just the broad brush measurements. Straight commission programs are far more effective if the former shotgun approach of a percentage for any sale is more targeted by offering varying percentages for different kinds of sales. For example, instead of offering 15 percent of the gross profit of every sale, it is more effective to offer 10 percent on the base business, and 20 percent on the increase, etc.
Sales force compensation is one of the biggest and most sensitive issues in a typical jan/san sales force. As such, it holds huge potential for impacting the company’s future.
We have a variety of resources for folks thinking about revising their sales force compensation. Click here to check them out.
Dave Kahle is one of the world’s leading sales educators. He’s written nine books, presented in 47 states and seven countries, and has helped enrich tens of thousands of salespeople and transform hundreds of sales organizations. Sign up for his free weekly Ezine, and visit his blog. For a limited time, receive $547 of free bonuses with the purchase of his latest book, How to Sell Anything to Anyone Anytime.
Disclaimer: Please note that Facebook comments are posted through Facebook and cannot be approved, edited or declined by CleanLink.com. The opinions expressed in Facebook comments do not necessarily reflect those of CleanLink.com or its staff. To find out more about Facebook commenting please read the Conversation Guidelines.