Monthly Recap: Tipless Restaurants, Commissionless Salespeople, and What It Means to Be Great

September was a look back at a series of posts that started in 2013 with an exploration of the idea of eliminating tips in restaurants and how that might be a clue toward eliminating commissions for certain sales positions. Even the BBC recently published an article, “Is This the End of Tipping?,” proving it is definitely a current subject. The post “Following-Up: Amazon’s Fire Phone and Tipless Restaurants” had the details and was soon followed by the post “Rethinking Sales: Part 9 – Sales Without Commissions.” There is obviously a lot to say on this controversial topic so the post “Sales Without Commissions – Some Additional Thoughts” was published three days later.

Along the way, an informational post discussed better writing in “MailChimp Publishes a Guide to Effective Communication,” IOS and Android went head to head in “Some Thoughts About… Android Versus IOS,” and some useful advice for everybody was provided in “Who Knew It Could Be So Easy to Curb Our Cravings for Sex and Food.”

However, back to the big question: Can a sales team be successful without a commission based compensation plan? As usual, “Yes, No, Maybe” is the answer. Yes: In my experience commission motivates salespeople to act in the self interest of maximizing commission, but does not always lead to more or better performance. In specialized markets, salespeople do not seem to perform worse without commission, but pursue projects based on other motivational factors: prestige, interest, and compatibility. No: With a well designed compensation plan, those self interests are aligned with company interests such as maximizing motivation, sales, and profit. Maybe: Examining specific company cultures and sales environments can lead to a reduction or even elimination of commission structures. Human motivation is complex and sales are a company’s lifeblood, the right balance can lead to higher levels of organizational health and success.

As a bonus to newsletter subscribers, here is an articled linked to by Phil Schiller, the senior vice president of worldwide marketing at Apple, “What It Means to Be Great” by Horace Dediu. Horace is known for his analysis of Apple’s business strategy and predictions of their financials, but to me he is more of a technical poet. It is one of the best articles I have read recently. He says:

“Greatness is transcendental. It’s hard to pin down. It inspires debate. It divides as much as it unites. It creates emotions as much as thoughts. It builds legends. It engages and persists. It lives in memory and penetrates culture. It implants itself in our consciousness persistently, to linger and dwell in our minds while we are bombarded with stimuli.”

Here’s to greatness!

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Sales Without Commissions – Some Additional Thoughts

After writing the recent post, “Rethinking Sales: Part 9 – Sales Without Commissions,” I came across the post that started this series “Part 1 – Rethinking Sales: Overcoming Functional Fixedness in Commission Based Selling.” Although it was written over two years ago, the basic ideas are still relevant. If commissions are eliminated and a reasonable (even generous) salary replaces them, there can still be a lack of salesperson motivation. The original post references a TED talk by Daniel Pink related to his book “Drive: The Surprising Truth About What Motivates Us.” The transcript of the talk is a quick read, faster than watching his talk, and a lot faster than reading his book. To summarize, employees prefer activities that include these three characteristics:

  • Autonomy: Control over their work
  • Mastery: Getting better at their work
  • Purpose: Involvement in something bigger than they are

So if you are considering eliminating commissions, careful planning is necessary to transition motivation from the strongly motivating “intermittent reinforcement” of commission checks to motivation based on other sources. To be continued…

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Rethinking Sales: Part 9 – Sales Without Commissions

What types of companies can begin to consider transitioning to a commission-less sales team? One answer comes from David Chichelli’s book “Compensating the Sales Force.” If salespeople are not the primary influence at the point of persuasion then why is commission being paid? These types of companies are common in high technology industries. If a company is the “gorilla in the marketplace” with brand recognition, effective marketing, great support, and significant mindshare from customers, then salespeople are probably not doing much to influence at the point of persuasion. These salespeople should be transitioned away from commission based compensation. R&D engineers are not on commission, support teams are not on commission, marketing is not on commission, why is the sales team so special? Apple’s retail stores are legendary for their sales performance and none of their salespeople receive commission.

In my experience, salespeople in these types of companies are laughing all the way to the bank. Their performance is only marginally influenced by big commission checks which are many times delivered at fancy sales meetings where the rest of the company is not invited. Many managers are probably thinking that their sales team would be decimated if the company shifted away from commission. The truth is that few sales engineers would leave. Where would they go? They are already working for the industry leader with job security, excellent products, and great support. Is a mature sales professional with a family going to leave that environment for a risky startup or B-player? With a lack of risk, the rewards should be correspondingly lower. Of course, this entire discussion assumes that sales professionals without commissions would still be paid a competitive salary, but that is part of the standard Human Resources type of discussion. More information can be found in the post “Part 10: Sales Without Salespeople – Commissions.”

Since this is a complex organization change that will take time to implement, the next post in this series will provide some detailed steps that can be taken to begin the transition to a non-commission sales team. It looks like it is already time to start planning for 2017!

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Technical Sales 101: Part 9 – Sales Compensation

As a result of a recent project (and several recent posts), I have been thinking quite a bit about salesperson compensation. Over the years, I have spent a considerable amount of time with salespeople and have heard the good, bad, and ugly sides of compensation plans. The overall goals are straightforward: reward exceptional performers and weed out below average performers. Most talented salespeople (and sales managers) are more comfortable with “industry standard” compensation practices. One book that I have used as a reference is Chicelli’s “Compensating the Sales Force.” This author is a more conservative sales compensation consultant with ideas that are in line with the state of the practice. To summarize a long and fairly complex book, the basic philosophy is that the major function of sales is to “persuade buyers in the face of uncertainty and risk.” Therefore, salespeople should be compensated for their ability to “influence the point of persuasion.”

This philosophy has a major effect on compensation plans. For example, if you are selling commodity products into your core markets, these sales typically have the least risk (and profit) so they should be compensated at the lowest level. On the other hand, growth initiatives typically require selling newer products, possibly into new markets, which is more challenging (and more profitable) so these sales should be compensated at progressively higher levels. These compensation goals can be achieved through a combination of techniques such as:

  • A higher contribution to quota for riskier products / markets
  • Simply increasing overall quotas from year to year to incentivize growth
  • With special one-time sales bonuses (SPIF – sales performance incentive fund)

In general, Chicelli’s favorite plan for outside sales engineers is called “3x”. It is a plan where top performers earn 3x the variable compensation component over the lowest performers and there is no cap on maximum compensation. To use real numbers, I took some 2013 percentile levels from this website: http://www.usawage.com/usa/sales_engineers-salary.php

  • 90th percentile of pay – $155K
  • 75th percentile of pay- $124K
  • 50th percentile of pay- $94K
  • 25th percentile of pay- $72K
  • 10th percentile of pay- $56K

Again, to summarize, Chicelli starts with a 70% base salary / 30% incentive pay plan with a target total cash compensation goal of around the 60th percentile (roughly $100K). If a salesperson does 100% of quota, they make $100K, poor performers make $70K (25th percentile) and top performers earn $160K which again is “3x” the variable compensation part of the plan. This is above the 90th percentile. This sounds complex, but it really isn’t and it still provides flexibility for companies to adjust contribution to quota from various product / market areas and to adjust the breakpoints for each tier of “3x.” A starting point could be 130%, 160%, 190%, 210%, etc. of quota to keep it simple and again, it is uncapped which salespeople tend to prefer psychologically. This also fits with the typical compensation budget estimates in which two thirds of the sales team makes their quotas. In typical years, the third that do not help offset the extra compensation paid to the top performers.

He also has some good ideas for compensating new hires, one of which is a “step-down guarantee.” This is where new hires also use the 3x plan, but it provides a guarantee that steps down from 75% of their target total cash compensation to 0% guarantee over six months. So in month one, they will definitely make 75% of their target total cash compensation, in month two, 62%, etc. A company could do this over a year if that makes more sense, but the total annual target compensation might be reduced since the risk would be lower.

Finally, a recent post from Chicelli’s blog is also a good, short read: “Moderate Pay Raises Slated for Sales Personnel in 2015 after 2014 Blowout.” Many new and successful salespeople could be at risk of leaving in 2016 due to a combination of the improving economy and the fact that many of them are having a good year this year, making 2016 growth targets seem hopeless. It’s great to have a great year, but the increase in quota due to “quota hangover” the following year can be rough, especially when demand for talented salespeople is back on the rise. In the next post of this series, the opposite side of the compensation equation, how salespeople (when motivated by the right compensation plan) can provide insight into your business that no other source can provide.

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Some Thoughts About Salespeople (aka Coin Operated Idiots)

Lars Dalgaard is a name you probably haven’t heard before. I certainly hadn’t until I read his article in TechCrunch “To Clean Up Your Startup’s B.S., Bring Sales Into The Leadership Team.” Even though I didn’t know him, the article grabbed my attention so I dug a little deeper and it immediately became clear that Lars is a heavy hitter in the business world. He sold his last company, Success Factors, to SAP for $3.4 billion and now he is on the board of Zenefits, one of the fastest growing business services startups in history.

So if Lars disagrees with labelling salespeople “coin operated idiots,” smart people should pay attention. This quote from the article says it all:

In addition to bringing the actual bacon – in the form of paying customers that make everything work – salespeople are the one group constantly in front of the very people you’re selling to. They can visualize the market like no one else, help build the go-to-market strategy, and give you intimate customer and competitive insights for the overall company strategy.

But as one business owner told me the other day, when he asked a group of salespeople what features should be added to his products, the answers were all over the map, and none of them seemed to be linked to actual revenue opportunities. The problem was the lack of a filter: a mechanism to identify, evaluate, and implement the best of the valuable suggestions into product enhancements.

Great salespeople are like race cars. They are focused on one primary goal and as Lars says, they “think, live, and breathe customers all day, every day.” So take 10 minutes and read the entire article, it is a fascinating glimpse into how a super successful CEO has leveraged his sales team into a major competitive advantage. Like a race car, salespeople can be a challenge to manage. They have too much energy for most people, but if you want to win the race, your safe, reliable Honda Civic ain’t gonna cut it. Sales needs to be included in your product development process. As an added benefit, you get a powerful, free measurement system, but that’s a topic for a future post.

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