Why do we pay sales commissions?

http://blog.fogcreek.com/why-do-we-pay-sales-commissions/

by buzzcut • 15 years ago

269 113 15 years ago

blog.fogcreek.com

binarymax• 15 years ago

I will tell you, for anyone who actually helps to build the selling product, there is nothing worse than watching a salesperson completely oversell a project, walk away with a fat check, and you are left holding the bag and working overtime.

parfe• 15 years ago

I can think of something worse: being the customer.

I had to integrate an existing system with a product sporting a 7 figure price tag. Most painful part involved dealing with disinterested engineers who brushed off our unmet requirements as "Blame the salesman."

The entire company deserves blame and the engineers should be fighting for better sales standards if they don't want to put the work in.

masklinn3• 15 years ago

> the engineers should be fighting for better sales standards if they don't want to put the work in.

That assumes they have any way to do so. Unlikely in the situation you describe, where engineers are probably considered an expense and sales "bring in the revenue", I'd expect sales to be completely siloed from engineering and that they don't give a shit.

Hence the depressing (and likely depressed) and disillusioned answer you got from engineering: they have no way to fight this internally.

deltaqueue4• 15 years ago

Over-promising is usually a result of a poor salesman who does not focus on maintaining long-term relationships with his or her prospects/clients (and will probably jump from industry to industry). Unfortunately this is rampant at businesses with high sales volume and lower software / contract prices because there is minimal incentive to focus on anything besides quotas.

If this happens often at your company, Client Services or Development needs to have a heart-to-heart with the sales manager.

sunchild• 15 years ago

Unfortunately, some of the most successful software vendors in the world have turned over-promising and risk-shifting into a way of life. For a million reasons, the market tolerates this injustice, and more often than not rewards it. It's hard not to be bitter about it.

paulhauggis4• 15 years ago

A couple of years ago, I worked at a place like this. The salespeople would promise features to new clients and guess at when they would be implemented.

As a developer there, it was my job to get them implemented by that time. I think I only stayed there 6 months before quitting for a better job..

swombat4• 15 years ago

Good old story:

A salesman and a programmer go on a bear hunting vacation together. As they arrive at the log cabin in the wood, the salesman tells the programmer: "Ok, why don't you unpack and get everything set up, and in the meantime I'll go find us a nice fat bear."

The sales guy leaves and the programmer start unpacking. An hour later, as he's about half done and taking something out of the car, he hears a loud roar coming from some bushes near the cabin. He looks and sees the salesman shoot out from the bushes, with a huge, snarling, growling, drooling bear charging behind him. The bear is enormous, all jaws and claws and muscle.

The salesman runs straight for the door of the cabin, the bear right behind him. At the last moment, he steps to the side. The bear, carried by its momentum, crashes into the cabin. The salesman quickly closes the door and locks it behind the bear. Loud noises come from inside as the bear trashes the place and tries to find its way out.

The salesman turns to the programmer and says:

"Ok, phew, that's one done. I'll go find another one while you skin this one."

davidbitton• 15 years ago

Our company does not have commissioned reps either, and frankly, I'm not complaining. Our sales figures are fine.

tptacek8• 15 years ago

Does your company have direct sales reps at all?

A direct sales rep has a one-on-one relationship with individual named customers and works with a marketing team to target prospects directly, and spends perhaps weeks of time (over the course of a sales cycle) with each customer.

bdfh42• 15 years ago

I remember some years ago talking to the CEO of a company that was doing a great job of selling to us - I mean way over expectations - fantastic.

I asked - how much are you paying that guy - he is great? the answer was - "an OK salary" - but they did find out what motivated him - for this guy it was vacation time.

Everyone wants a salary that reflects their worth in a business - then (for peak performance) everyone might have different motivators. It might be recognition, a great car, a better office - it does not matter - find out what it is and supply it...

numlocked• 15 years ago

But surely all the logic applied here to commissions also applies to quotas, right? (measuring performance, assigning credit to a sale to a particular sales rep, dividing up territories equitably, etc) But the post doesn't mention eliminating quotas. Wouldn't they go hand in hand? Can you have a sales force without quotas?

tghw2• 15 years ago

Someone else from Fog Creek can correct me if I'm wrong here, but I believe our sales team has a quota, but the individuals don't really. This way, they're all helping each other to reach the team quota, instead of possibly working against each other in order to hit their own quotas.

edw519• 15 years ago

...and are less worried about who is going to buy right now...

So you implemented a system that makes people less worried about the most important thing to worry about?

OP makes many fine arguments about the pros and cons of commissions, but this one little nit trumps them all.

There are many reasons for businesses to suffer and eventually die: capitalization, profitability, positioning, etc. but insufficient revenue is the biggest poison of them all.

I always thought of revenue as the water level in a creek. Enough covers all the ugly rocks below. Insufficient exposes all other weaknesses.

It sounds like Fogcreek must be doing rather well for this to work and I'm happy for them. But it makes me wonder: if revenue ever starts failing to meet projections, how soon will commissions be re-instituted to stop the bleeding?

[EDIT: Some of the replies below imply that I overlooked the words "right now", but that was exactly my point: like oxygen, "who is going to buy right now" is the most important thing to worry about. Enlightened organizations may be able to ascend Maslov's Hierarchy of Needs, but as soon as sales people worry less about Level 1: Revenue Right Now, I begin to worry.]

tghw2• 15 years ago

The emphasis is on right now. We definitely care who buys, but without commissions, there's a lot less pressure to get them to buy right now. That helps us get better customers because we take the time to answer their questions and help show them how our products can solve problems for them.

In the long run, this is a much better situation for us. The customers are, on average, happier, which means they keep coming back, they recommend us, and they need less support.

JoachimSchipper• 15 years ago

Apparently, they've had "record months" since implementing this system.

samaparicio• 15 years ago

To me, the article is about 1 or 2 years too early. It provides great detail about all the pros and cons of judging the choice in advance, but no evidence that they made the right choice. Unless Spolsky is ready to start judging the performance of a sales team by some metric other than revenue.

funkah• 15 years ago

You've really gotta be looking for something to disagree with if that's what you've decided to hang your hat upon. The words "right now" were emphasized in the original sentence for a reason.

If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.

swombat4• 15 years ago

If taking away commissions didn't hurt sales, why would reinstating them fix some hypothetical sales problem? This makes no sense.

Because the reason why sales didn't drop might be because of wider factors that outweighed the removal of commissions. Once/if the "water level drops" and management start panicking, they might consider reversing their position on sales commissions, at least to see if it makes a difference for the better.

Seems like a pretty obvious line of thinking to me.

chc• 15 years ago

Although you have a point, I think you take it too far. Many of the worst decisions I have seen salespeople make were based on the drive to get someone to buy now rather than, say, next week. They even knew that rushing things was going to be bad for the customer, but the salespeople's interests didn't align with the customer's.

If you pressure someone into a sale now and they decide to leave soon afterward — perhaps even demanding a refund or issuing a chargeback — you've probably lost them for at least a year, and then the company is worse off than if you hadn't made the sale at all. But if you take a little while to make sure you get it right, the lost week or month will get canceled out by how happy they are with what you've given them.

So you're absolutely right that, all other things being equal, a sale right now is better than a sale tomorrow. But all other things are not always equal, and if you try to force every peg you find into that round hole, you're just going to end up with a lot of broken pieces.

bcrescimanno3• 15 years ago

I disagree with your edit; with the quick adage that it's far easier and cheaper to retain a customer than create a new one. It sounds to me like Fog Creek has a mix between sales and account management (but so do a lot of companies that I've come across). If your sales team is also working in that account management role, retaining their clients should always be high priority even if those customers wont' be up for renewal / another contract for some time.

Moreover (and I'm reading between the lines a bit here) I think part of that statement is referring to sales people ignoring the "hard" sales and focusing only on the "easy" sales. "Are you ready to buy? No? Ok, I'll call again in 6 months" becomes, "Let's talk about your concerns so that maybe you'll buy in a month instead of 6."

jxcole• 15 years ago

I disagree strongly, even after your edit. Revenue right now does not ipso facto translate to a better or more sustainable business. Google is a great example. They could plaster their front page with advertisements which could, quite possibly, generate more revenue right now. But they know that users having a good experience right now will bring them back tomorrow. So they put off some possible ad revenue in the hopes that their users are more likely to continue using their service.

The same thing could be said of any company. It is possible to drive too hard to make a sale and alienate your customer. Right now you may benefit. But later down the road you will probably develop a bad reputation.

swombat4• 15 years ago

Actually, plastering their home page with ads would most likely cost Google revenue right now, because they will get a far higher conversion rate on their ads once they actually know what it is you're looking for. And once you've searched, you might notice that the page is indeed plastered with ads.

More importantly, we're talking about salespeople hired to scale up a proven business model, not entrepreneurs exploring different ways to make money.

Focusing on the "right now" as an entrepreneur can cause all sorts of issues, but if you hire a salesperson to sell your known product to a known target market based on a known process, they better fucking well be focused on closing the sales right now. It obviously depends on the industry, but I'd say that in most cases in B2B, without the drive of a salesperson trying to close the deal right now, every deal will take twice as long and half the deals will probably never close at all.

kokey• 15 years ago

I think it also depends on what stage a business is at. I think if you are in an initial high growth period the emphasis should certainly be on the 'buy right now' customers, these are new customers trying out a new company or customers you are taking off a competitor. I think commission structures are more appropriate during this phase, the business still needs to find what type of customer it works best with, and it needs to get a critical mass of these, and this is mostly a numbers game.

However, there is a point where you've reached a certain critical mass, where your happy customers market for you, where your own marketing and presence sells the company. Like Fog Creek, which is now an established and known company. At this point you will do better at growing your customer base through marketing instead of commission driven sales, where customer service to the existing customers will do the selling for you, and changing the pay structure of your sales people will align them better to this approach. It also allows you to convert your customer base slowly to those you know will remain with you for longer. I think you still need to keep statistics on sales performance, and deal with bad performers and promote good performers, but these should be closer to a bonus structure and work over longer timescales, like the rest of the staff.

deltaqueue4• 15 years ago

I suspect FogCreek had success because their sales team is relatively small, but I'm curious to see how this works long-term. Is a lack of commission structure going to deter future recruits? They said nobody left, but have they tried hiring any additional sales reps? Big time sales reps will assuredly balk at the prospect of cutting their income to some average amount, but perhaps that type of employee only exists at larger organizations.

As a sales engineer, I'm not sure I agree that employee views can be divided into a black-and-white categorization of X vs Y. I'm not lazy, want to avoid work, etc., and yet I still think a $200,000 deal requires more work and yields more profit for the company than a $5,000 deal, and thus I should be rewarded for that additional effort.

Comparing this reward system to coding or some other profit-generating segment of the company only works part of the time. With sales, the increased profits available for reward are immediately clear. With coding, the value-add of a coder's efforts are less clear, so it's up to his or her manager to see the financial impact of that employee and reward accordingly via bonus. Simple example: a friend of mine optimized some javascript, reduced the file size, and this ultimately saved his company over $200,000 a year in bandwidth. This is quite clear, whereas a simple bug fix or new feature is not.

bcrescimanno3• 15 years ago

I agree with your thinking that some sales folks might balk at the notion; but I'm not sure I follow your argument you should be directly (financially) rewarded for the additional effort in the larger deal. I've known several sales folks who chase many small deals simply because they're a lot easier to manage, require less time to close, and by collecting as many of them as possible, they're able to maximize their commissions.

My thought is that, just like in every other aspect of the business, your top players will be your highest paid as part of the normal compensation process--and those top people should be the ones closing the bigger deals. Just because you don't get cut a check for that specific deal doesn't mean there wouldn't be rewards for doing so.

deltaqueue4• 15 years ago

"I'm not sure I follow your argument you should be directly (financially) rewarded for the additional effort in the larger deal. I've known several sales folks who chase many small deals simply because they're a lot easier to manage, require less time to close, and by collecting as many of them as possible, they're able to maximize their commissions."

What's the difference? In either scenario, you are rewarded proportionately to how much effort you put into landing one large deal or multiple small deals.

"My thought is that, just like in every other aspect of the business, your top players will be your highest paid as part of the normal compensation process--and those top people should be the ones closing the bigger deals. Just because you don't get cut a check for that specific deal doesn't mean there wouldn't be rewards for doing so."

I suspect commissions simply originated from sales reps demanding recognition for their efforts. Bonus structures and salary positioning through systems like FogCreek assume you have fair and competent managers who recognize and reward effort. Sales teams may not always present this luxury, so reps may simply demand these commissions to cover their bases.

dmitriy_ko• 15 years ago

>a friend of mine optimized some javascript, reduced the file size, and this ultimately saved his company over $200,000 a year in bandwidth.

Is this a real-life example or a hypothetical situation? Hard to imagine this to be realistic unless this is one of the top 100 sites in the world.

matwood2• 15 years ago

and yet I still think a $200,000 deal requires more work and yields more profit for the company than a $5,000 deal, and thus I should be rewarded for that additional effort.

Interesting. I wrote a particularly tricky piece of code today. It required much more effort on my part than some simple code I wrote last week, so I need to be rewarded for that additional effort. Oh wait, I am rewarded with a salary for doing what I was hired to do - solve problems writing code.

What FogCreek is saying is that it should be the same thing in sales. You're hired to do sales. It doesn't matter if it's $10 or a million dollar deal, that's your job. Why should it be any different than any other salary person?

Another interesting thing to me is when sales people talk about all their great sales, but seem to forget that someone created the product they are selling. If thought about in that manner each sale should cause the entire company to get paid. In fact, that's exactly what pays the salaries of everyone who works there.

deltaqueue4• 15 years ago

The difference is that the additional effort put forth in the sales process yields direct, tangible profits, whereas coding efforts are not always as easily quantified.

Think of this from the perspective of an owner. If you are going to choose between two sales guys, one who pulls in $10 deals and another who pulls in million-dollar deals, who are you going to choose? OK, now that you've chosen the latter, how much are you going to pay him? Since there's no simple way to come up with an arbitrary worth, say you settle on a nice big offer for him. What if he stops producing stellar numbers (due to personal deficiencies or market forces)? Do you fire him or reduce his pay? Doing either is sure to infuriate him if external forces are at play, so the only alternative is a merit-based commission system.

I'm not saying it's right for companies who only pay sales commissions and don't reward coders--there absolutely should be profit sharing and bonuses for programmers with measurable contributions to the company--but this process is in place simply because sales' efforts are infinitely easier to quantify and reward (from a profitability standpoint) than are programming efforts.

johnx123-up• 15 years ago

I'm with you on this. On my previous company, they had this no-target no-commission sales policy and it did hurt them. When one smart sales head realized, the company grown up 20-times with target and commission based structure.

briandoll• 15 years ago

IMHO, a key reason this works well for them is that their compensation package is really nice and well rounded: http://www.joelonsoftware.com/articles/fog0000000038.html

In short: they pay market rates based on a transparent internal system of scale, they have a generous profit sharing plan (thus motivating everyone to increase profits regardless of role) and excellent benefits (health and non-health related).

It's hard to argue against a system like that.

matwood2• 15 years ago

That's what I was coming to say. At FogCreek basically the entire company is on commission (profit sharing), which is how it should be.

AlexBlom• 15 years ago

I agree that commissions can generally be corrosive (and are a hallmark of lazy management, generally speaking), but I have to wonder how this would work in larger teams.

In smaller teams (when managed well, and with the right talent), the focus is always on the sales number vs. the sales commission, which is properly considered as a byproduct of the sales number. If you dig deeper, many of the negative attitudes are associated to reps working to hit their sales number.

My assumption is that sales numbers still need to stand at individual levels (to avoid social loafing) unless the team as already proven themselves. I'd be interested to see what different problems this tactic floats later down the road.

MBCook• 15 years ago

and are a hallmark of lazy management, generally speaking

That's my thought. I really like the idea of commissions to reward hard work, but either way you have to manage things right.

At one small company I worked at, the main sales guy received very little (if any) commissions. He didn't get many sales at all, but that wasn't a big issue since he had his salary.

At another, there were three sales people on commissions. One of them didn't sell much or provide much value, but he had in the past. As long as his old clients didn't leave, he kept getting paid (due to the way things were structured). This did not endear him to the other employees.

The other two sales people were very motivated by the commissions. They could sell a ton, which would be great if it wasn't for the way it was done. They were in constant cut-throat competition, trying to adjust things so their numbers would be 1% better at the other one's expense. This just devolved into a ton of fighting, eventually causing controls to be put into place to prevent either one from tweaking things. It was also easier to get a new customer to pay us for a few months than increase old business or keep them happy, so customer turnover was very high.

The best system I saw had one person working to get new business (on commissions), and once the sales was in it was managed by someone else (on commissions for keeping/improving their business). This removed the incentive to replace good old customers with fly-by-night new ones, but it was a very small team so I'm not sure it would have scaled very big.

Whether there are commissions or not, management needs to keep an eye on things to intervene when something is happening that's not in the organization's best interest. There are plenty of sales people (just like every other profession) that are happy to take advantage of companies if given the chance. Some people can do an amazing job for you, but need a ton of oversight.

leelin• 15 years ago

Measurement & Leverage?

My experience in sales is tilted almost exclusively to real estate transactions, but I'll say PG's How To Make Wealth Essay offers an explanation (http://www.paulgraham.com/wealth.html).

There is large variance in skill when it comes to many jobs, but in sales it is huge. Fortunately we can measure and properly attribute the more skillful salespeople, and those people have a pretty clear impact on the firm's revenues. All the negatives mentioned in the post are certainly true, although in real estate the mitigating factor is that the biggest source of leads for good brokers are referrals from past happy clients (enterprise SAAS is probably less viral).

Sadly there is also large variance in programming skill, but it's far harder to quantify or justify or transport to the next employer. In real estate, if you suck and sold no houses in 2 years as a broker, or if you were awesome and sold 30 houses, that's easy for a future employer to notice and verify. When I interview for hacking gigs, no one really knows whether I did a good job, I can only say what I generally worked on and have them take my word for it as a 1/N contributor. Self-employed programmers seem to be able to sidestep some of these problems.

smackfu2• 15 years ago

Why didn't they call this blog post "Why we don't pay sales commissions"?

T-hawk• 15 years ago

That "we" means industry in general, not Fog Creek.

smackfu2• 15 years ago

I get it, but it's odd, since "we" ends up meaning "not us".

johngalt2• 15 years ago

I was very pro-comissions until I worked commissioned sales. Completely agree with the author.

I had extremely high numbers, but I hated the work environment. Suddenly every other salesperson wants a piece of you. Trying to stick their names in for a percentage of the sale. Screwing my long term clients for a very small short term sale. Even breaking into my desk to copy my book of business. Adding commissions = scorched earth among co-workers. Not even talking about how this affects training/new hires.

Without incentive my performance would have been equal or better. Commission sales specifically attracts sociopaths.

edit: Despite the above; I think hackers should try a real sales job at some point. It's empowering once you learn how easy it is.

notahacker2• 15 years ago

I worked in a commission sales environment and had a completely different experience. Probably your company management sucked. As it is I had my reservations about my management too, but the payment of commission has the neat effect on focusing attention on boosting their bottom line and diverting oneself away from most of the other dubious metrics they liked to distract me with.

I raised an eyebrow when Joe referred to system-gaming by "making fake phone calls to hit call numbers". If you're incentivising staff with ensuring they adhere to largely meaningless metrics like that you're doing it wrong (it's more or less exactly analogous to judging programmers by their lines of code). Beating them with a stick for not meeting those sort of targets is "coercion", not to mention requiring data-collection time sink; offering a carrot for things sold, which presumably requires tracking anyway, isn't.

Commission sales specifically attracts people who consider themselves to be better than average salespeople. Yes, sometimes they have sociopathic tendencies (although they tend to be the ones who only think they're good). Yes, without going to the ridiculous lengths of some recruiters, good salespeople do tend to have a more mercenary attitude towards work than programmers (they don't have weekend cold calling projects either!), just as programmers on average have somewhat different motivating factors at work from investment bankers, academics and actual rock stars. Even if greed isn't always good, sales roles with an absence of commission and commensurately higher salary incentivises those who suck at selling (or who despite impressive credentials suck at selling your product specifically) to stick around longer. If you're a startup, you're probably not able to offer your staff as attractive a package as Fog Creek or select your salespeople so successfully in the first place.

I agree with the original poster that sales jobs are a good idea for hackers considering starting a startup

contravert• 15 years ago

Can you elaborate on what you mean by "how easy it is"?

AnonSales6• 15 years ago

I don't want to speak for John, but this is my answer to the same question: "Sales isn't rocket science, it just takes someone who is comfortable talking to people...and when you're selling something you believe in, that's really easy to do."

johngalt2• 15 years ago

Maybe it was colored by my expectations going in. With no prior experience, I'd assumed that sales was an arcane art. A combination of charisma and manipulation. Working in a sales role, I felt out of my element for months. Until I learned that sales is a building process just like anything else.

Create a system where you maximize the number of people weighted by their need of what you sell. Presented at a timely moment. The client should see you as a domain expert, and someone who makes the process frictionless. Pricing is a surprisingly small part of it. If you can build a good process, you'll sell 10x what the car salesman types will.

Unconventional approaches to sales are the most successful, so a hacker mindset pays off. Once I got over my initial fears, it was quite easy to get the high score :)

krschultz• 15 years ago

I didn't have that at all. I did did commissioned sales for several years, and then I worked at a company as an engineer that had commissioned sales guys. Yes, you had to hand out the new customer leads equitably or people would freak out. But none of the stuff you mentioned happened. That sounds like a toxic work environment.

edit: I worked at a place where the salary was enough to cover me and the commission was a bonus of 50-150% on top of the salary. I always knew I was at least starting at a living wage. If I was starting at 0, it might be different. Also, we would do 1-2 sales per day, so the volume was high enough that a lead here or there didn't matter. But in businesses where a sales guy makes 3 or 5 sales a month, I can see why each individual sale can be fought over.

Cass• 15 years ago

I'm surprised Fog Creek kept commissions around for so long, considering that Joel has been writing articles about how incentive pay causes dysfunction since 2002 (Edit: 2000, even!)

http://www.joelonsoftware.com/articles/fog0000000070.html

http://www.joelonsoftware.com/news/20020715.html

http://www.joelonsoftware.com/items/2006/11/10b.html

jriley• 15 years ago

The most effective sales quota scheme in my corporate experience: 10% higher sales than your last quarter.

There are many more complicated systems, but this one was very difficult to game.

notahacker2• 15 years ago

It's a good way to ensure a dip in sales at the end of a good quarter.

JumpCrisscross2• 15 years ago

The article mis-interprets Ariely's study.

Fog Creek asserts that the study shows a negative relationship between commission and performance. This relationship was found - for very large rewards. Small rewards increase performance when compared to no reward.

Here is the original paper: http://m.pss.sagepub.com/content/15/11/787.short.

In a follow-up study, he showed that effort increases with reward almost as predicted, but error rate increases exponentially: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-937X.2009..... The effect is also variable depending on whether it is a primarily intellectual or mechanical task.

I'm not making a ruling on commissions here, just saying the Ariely quote corroborates Fog Creek's null hypothesis.

buzzcut2• 15 years ago

I linked to the video where Ariely talks about the U-shaped effect (that is small rewards increase, but large ones decrease, performance). I mentioned him to demonstrate that there was some evidence for the notion, not to say that he entirely makes the case I'm arguing for. Given the thousands of ways commissions can go wrong, I'm asking whether any small increase in benefit is ever outweighed by the problems.

JumpCrisscross2• 15 years ago

I think it would be fine if it added a note in parenthesis clarifying that. The question you have posed, whether the small benefit outweighs the many risks, is a valid one, but one that needs to have the premise of the small benefit established.

I suppose, in a purely theoretical discussion corner-stoned by Ariely's research, the question becomes whether sales is a more mechanical or creative task. I would argue that in a split sales/customer service environment it could very well become the former. Whether that is desirable is dependent upon one's business model.

Absolutes are probably not the answer - there will be models, e.g. Groupon or real estate, where sales commissions may be well worth it. Businesses that depend on relationships, however, may want to re-think a system that encourages maximising the rewarded variable at the expense of all others. Bringing light to the assumption that salespeople require commission, though, is a nice place to start - thanks for that.

elmarschraml• 15 years ago

Why salespeople are on commission? Because it's one of the rare jobs where performance can be easily and objectively measured.

Most of the arguments in the article could just as easily apply to a fixed salary (jumping ship for better pay, fighting over who gets the big deals etc). And I would argue that the theory y vs theory x argument, that good employees are by nature more intrinsically motivated than just in it for the money, probably holds true a lot more for programmers than for salespeople. By definition, sales is about getting customers to pay money, so for a salesperson it's probably a good thing to be motivated by money.

The real question about commission-based compensation is: Is what I measure, and pay people for (this quarter's revenues) really what I want to achieve (maximum long-term profitablity)?

If you pay by commission, you will probably get higher revenues right now, but also more of the problems mentioned (mostly overselling to customers that arent really a good fit for the product).

I'd say it depends on the situation the company is in. If you're an established, profitable software company like FogCreek that wants to build long-term relationships with happy customers, a fixed salary is probably better. But if you're a startup with 2 months of runway left, desperately needing some revenue right now, you're probably better off paying commissions to your salespeople.

bandushrew• 15 years ago

"Because it's one of the rare jobs where performance can be easily and objectively measured."

That is only true if you focus entirely on sale dollars as the measuring stick.

It is much harder to measure the impact of things like customer satisfaction, office dysfunction, job churn and so forth.

AnonSales6• 15 years ago

Long time HN contributor, first time I've felt the need to go anonymous.

I've been in sales my entire professional career, but always commissioned based. I've worked in SMB with small teams and enterprise with massive teams. I feel like these are related points (to paying commission), but you may have a different opinion.

First, commission is like crack. Once you get a taste, it's hard to kick. Earning potential is outrageous. I was the highest paid employee for two years. I made more than the founders, anyone on our leadership/executive team, and anyone that built what I sold. That last point kept me up at night, so I eventually found a way to redistribute the wealth. I stayed in sales because I couldn't imagine "how anyone could live on that little" (< $100k). It's hard to quit.

Second, crack either transforms people or attracts a certain personality type. I've never been surrounded by so many disloyal, self centered, unethical, and maniacal people. Ever. I've also caught myself crossing boundaries I would have never previously considered -- until I thought about how it would push me over the accelerator and significantly increase my commission. I have met some people with strong character and ethics in sales, who are great salespeople, but they're a tiny minority.

Third, those ethical breaches typically result in misrepresentation of the company/product/service you're selling. Commissions are typically paid on a contract, not on the lifetime value of the customer. I firmly believe the commission-based sales people are potentially the most damaging thing to your company. Set an inaccurate expectation to close the deal? As a sales person, you're on to the next one. Results in high churn and damaged credibility, neither of which affects the salesperson's commission check.

Last, sales people are typically the least knowledgeable in the organization about the company/product/service they're trying to sell. I've always been in, uhm, technology as a service(?), but neither of the companies I've worked at have any desire to hire people who understand the technology. They hire salespeople that have "consistently exceeded quota" and "increased customer spend by x" or some other sales achievement. That's great, dude, but you sold fucking vacuum cleaners. What do you know about the product those guys in the dark rooms are slaving away over? Why are you the best person to go out and represent all of us in the market? Speaking of, I've yet to interview a salesperson that's come in with "here's a list of my previous clients who will vouch for my integrity."

For those talking about large sales team, I can personally assure you all of the negative aspects mentioned in the post become even more apparent with scale. Poaching leads, generating fake orders, tarnishing the company to exceed quota ("total lack of ethics")-- it's all there, and it's easier to hide in a bigger pond.

I know you need to move units and generate revenue, but I agree, why do we pay sales commission?

maaku2• 15 years ago

* Commissions are typically paid on a contract, not on the lifetime value of the customer. *

If I give my sales people a cut of the lifetime value of a customer instead of the immediate contract, would that be better or worse?

AnonSales6• 15 years ago

That's a really good question. The short answer is, "it depends."

In my mind, the problem is that commission is an incentive to do whatever it takes to close the deal -- especially if you're in an uncapped commission with accelerators. For example, if I'm paid 10% on my first $300k in new business, 15% on $300-499, 25% on 500+, I'm doing everything I can to hit $500k, right?

I (the commissioned salesperson) would lie to my mom if I'm at $490 with a $12k deal on the table. I'll lie to you, and I'll tell you things about our product/service that aren't true. You'll do this one project with us, I'll get my gigantic commission check, and then you'll a) never come back b) tell everyone you talk to about us and c) not affect my commission check. I'll also put on my resume that I "exceeded monthly quotas" and smile. Remember, I'm here to get paid. That's why we're in a commission-based role. [edit: Please keep in mind that I'm giving accounts of what I've seen, not necessarily what I've done. I wouldn't lie to my mom. Others would.]

I believe you can mitigate that problem by paying out over a term, or upon certain achievements (deployed, customer gave us a positive rating, etc.). However, what additional problems does that create in your organization? Is it good or bad to have the salespeople managing (micro or otherwise) the delivery ("selling is not delivering")? Does that compensation model get too complicated?

Call me an optimist, but I wish companies would hire people that want to truly evangelize their widgets, put them on a base salary, and then measure performance. Sales isn't rocket science, it just takes someone who is comfortable talking to people...and when you're selling something you believe in, that's really easy to do.

dextorious• 15 years ago

"""Think for a second: we don’t insist that other kinds of workers be paid on commissions. Only an amazing idiot pays a programmer by lines of code."""

This is an idiotic argument, if I ever saw one.

Lines of code don't measure the programmers contribution to your companies bottom line.

Sales do.

That said, paying sales commissions to sales people is not that different than giving shares and stocks options to programmers as an incentive.

A mediocre post, at most.

storborg• 15 years ago

Previous posts[1] have indicated that Fog Creek does rather extensive profit sharing. Isn't that just a form of commission? Further, profit sharing includes non-sales employees.

[1] http://www.joelonsoftware.com/articles/fog0000000038.html

tibbon• 15 years ago

Honestly, I think places use commissions for the reason of underpaying some salespeople- not for the reason of rewarding top salespeople.

In my experience, commissions exist so that places can hire a ton of salespeople with relatively little risk to themselves.

d_meyer• 15 years ago

Atlassian (which also makes bug tracking software) has been around longer than Fog Creek, and doesn't even have salespeople, much less commissions.

Demonstrated model of success, no need to blog about it in 2012.

krallja• 15 years ago

From Wikipedia:

"Atlassian was founded in Sydney in 2002"

"Based in New York City, Fog Creek was founded in 2000"

absconditus2• 15 years ago

That is not true. When my employer was evaluating JIRA we were contacted by people who performed the same function as salespeople. They are definitely not pushy and did not take us out for steak and strippers, but they do seem to exist.

fellars• 15 years ago

Do you know if that was people from Atlassian or a licensed reseller? My understanding was they use 3rd party resellers but don't have a sales team themselves, but could be wrong

gallerytungsten• 15 years ago

Very few salespeople can actually sell. By which I mean find prospects, build a pipeline and actually close deals on their own. Many are just order-takers who are in the right place with a warm prospect. I would put the percentage of "real" salespeople at around 20%.

Many people hired for a sales job never actually sell enough to justify their cost to the company. Hence the need for commissions as a way to weed out the many non-performers.

If all or a majority of compensation is commission, you also deter the non-performers from trying to get the job in the first place.

enjo• 15 years ago

That would imply that commissions are the only way of measuring performance. Everyone in a company has to be accountable to their performance, why should sales be any different?

tptacek8• 15 years ago

I have trouble with a comparison between incentive comp schemes for programmers and sales commissions. One of the biggest problems with programmer incentive comp is the need to align it with business goals --- which is why you'd have to be an idiot to pay per-line-of-code. Programmer comp is several layers of indirection away from company income.

The same is not true of sales comp. Salespeople earn commissions on money they are bringing into the company. It's much easier to measure and while it's not easy to perfectly align incentives (which is why sales teams have spiffs and regions), it's at least possible.

Remember also that the alternative to "no sales commissions" probably isn't "lower paid account managers"; it's "account managers paid nearly as high, but on a salary basis". The best sales account managers can virtually print money; the median sales account manager can't sell bottled water in the Sahara Desert. Most companies that do direct sales need to attract talented sales teams.

But even with a perfect sales team, most products have sales cycles stretching weeks-to-many-months. Which means it can take a quarter or two to see how a sales account manager is going to work out. If you're paying them fixed comp, that's an awfully expensive experiment to run.

I have no idea how well this works with "inside" sales teams ("dialing for dollars" operations); maybe fixed comp makes more sense there.

onemoreact• 15 years ago

Sales only directly links to the bottom line in the vary short term. If SAM up sells a customer on something they regret buying then the company can easily lose out on 20x sales for that short term bump. More importantly if Sally answers a phone call from SAM's client who want's some info but is not buying anything that day then it's hard to structure things she is interested in providing info vs trying to promote an instant sale.

tptacek8• 15 years ago

These are real concerns but they just aren't the common case in sales. In the common case, selling someone $50,000 of licenses is a $50,000 win for the company.

Moreover, most sales account managers are intrinsically motivated to set things up for the 20x sale, because they're likely to own the account when the 20x home run comes in.

Most sales teams have spiffs set up to account for the "real estate agent" problem where short-term deal flow trumps revenue maximization.

I agree that managing a direct sales team is a hard problem, but in terms of designing an incentive comp plan, it's hard to argue that it isn't easier than doing incentive comp for developers.

unobfuscate• 15 years ago

Having lived through a company with long sales cycles (3-6 months +), they needed to pay sales people for the first 6 months, driving them down to full commission/zero pay after a year. So the experimentation was needed whether they were being hired on salary, or moving toward commission.

This is probably completely different for lower ticket items that have shorter sales cycles (like bug tracking software). But it also speaks to the risk they took, given that they weren't wasting money experimenting on the sales staff. (their effectiveness was quickly apparent).

tptacek8• 15 years ago

That's what happens when a company introduces its first successful product, but it isn't the steady state for a sales team, which will bring new account managers on for a long time after the product they're selling proves itself out.

An account manager hired into a 2-year-old sales team that has been making its quarterly numbers isn't going to be eased into commission comp.

mgallezot• 15 years ago

How did they transition from a base + commission package to a base only ? Does the salesguy that use to get a higher than average commission now gets a higher than average base ?

cjy• 15 years ago

I thought this article made a lot of really good points (especially about wasting time tracking commissions).

However, the OP seemed to miss why we pay sales people with commissions but programmers with salaries: it is easy to objectively measure the output of sales people and it is not easy to objectively measure the value of code.

If you asked the question, "Why do we pay most people in salaries?" the answer is because there is no easy way to pay-by-performance for most creative, subjective, or service oriented tasks.

niklas_a• 15 years ago

I'm sorry to say that this is wrong on so many levels. We engineers like to believe that the author is right and our guy gut tells us that "hey why do the sales people get commission and I don't??".

So why is the author wrong?

While there certainly ARE cases where commission is being used in the wrong way, there is nothing inherently wrong with it.

1) The author misinterprets the research and states that people perform worse when under an incentive. This is only true for INTELLECTUAL tasks. If you tell one group of people that they get $50 if they solve a math problem in five minutes then that group will perform worse than another group without an incentive.

But if you tell one group of people they'll get $20 for every brick they move from A to B in five minutes you can be sure they'll move the bricks much faster than a group with no incentive.

2) "The problems include infighting over who gets credit for accounts and sales." Again, a problem with how you set up the system. This fighting can easily be avoided. Just make sure it is clear who is responsible for each customer.

3) The author also forgets one of the great features of a commission based system. If you are a small startup you may not be able to hire a large sales force. In that case, you can hire great sales people at a low base salary and make sure they only get paid when you get paid.

TL;DR: commissions are a tool among others. Use it well and it will help you. Use it in the wrong way and it won't. Use common sense.

te_platt• 15 years ago

I think it's a stretch to say the author is wrong. He was very clear in stating that aren't necessarily bad, just that they come with costs. In his case it looks like the costs outweighed the benefits.

polymatter• 15 years ago

I disagree that sales is a menial task.

If it were, there would be a small difference between the best salespeople and the worst. Everything I've seen suggest the variance is bigger in sales than it is in programming.

chernevik• 15 years ago

It's a very thoughtful post, they've put the usual Fog Creek thought into this. But I suggest that one year is not enough time to properly evaluate the policy.

For one thing, I wouldn't say this is known good until the organization has demonstrated to itself that it can recruit / train / inculcate new people into this system. I'd suggest they'll also want to keep an eye on how the sales team evolves over time -- habits die hard, but they do die, and it may be that the commission system served to ensure that some positive habits were maintained.

For another, this may be suited to their competitive niche, or even this particular moment in their market penetration. If the product is selling itself, if the market is growing for everyone, then commissions may not help and may be counterproductive to the image and relationships they want to build. The situation may change if the market position matures and stabilizes.

I'm not saying any of these _will_ be issues. I'm just saying that corporate cultures develop over periods of years, and that comp systems are important signals into that development. It sounds like this is going great, and good management will always be looking at how corporate culture is moving -- but I would think management would want to keep a careful eye out for unintended consequences of this for quite some time.

(And they may well be doing just that. But the post seems a little more definitive.)

paulhauggis4• 15 years ago

"Our salespeople all estimated that they were spending about 20% of their time just keeping track of what money was due them. There was constant horse trading."

I had to laugh at this. How is this that difficult? An excel spreadsheet with a few columns might only take a 20-30 minutes per day (if that). If it's based on a percentage, excel can automatically calculate that based on a column. I am a re-seller for a few products online and this is exactly how I calculate it. I have another sheet that tallies all of my monthly revenue. I can't imagine it being much different when selling services or products for a company like Fog Creek. You could also keep track of all names/companies, etc. here.

I'm going to offer another perspective: Fog creek basically just gave themselves a pay raise. Rather than giving salespeople a cut of the sales, they now are paying them a flat-fee.

Some people may like this because now they have consistent income. However, it's much less than what they could potentially earn. If I was a salesperson there, I would quit. I would like to see the results of this in 1 year (or 5 years). I suspect they will switch back to a commission-based system within that time-frame.

It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.

In a way, it's like converting from free-market capitalism (you have no limit to your success) to communism (everyone is now equal).

They do this to developers all the time. Every job I've ever had has been based on salary. This sounds great, until you realize that the employer now has no incentive to keep you within 40 hours/week.

At one company, the new COO came in and announced that new working hours were an hour earlier and half-an-hour later. Everyone working there was on salary, so we essentially all got a pay-cut.

ceejayoz• 15 years ago

> It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.

Well, that was dumb.

Ditching commission doesn't mean performance can't be rewarded, via bonuses for good performers, generous raises when merited, etc.

jacques_chester5• 15 years ago

> Fog creek basically just gave themselves a pay raise. Rather than giving salespeople a cut of the sales, they now are paying them a flat-fee.

Fog Creek have taken on the sales risk entirely from the sales staff. It's not a one-way trade.

tptacek8• 15 years ago

Competent direct sales people choose that career because they are good at handling that risk and like the boost in compensation they get from it.

The guy who's content with the base salary is almost the definition of a sales account manager who isn't working out.

paulhauggis4• 15 years ago

"Fog Creek have taken on the sales risk entirely from the sales staff. It's not a one-way trade."

I suppose. But without sales, they would be out of business. They take this risk on regardless of what they are paying their sales staff (Business is all about taking risk).

I wonder what percentage they were actually giving their sales staff..10%..20%? I doubt it was over 50%, so they aren't really increasing their risk by that much.

gamble3• 15 years ago

The fundamental reason companies use commissions is because it shifts risk from the company to the employee. Companies that depend on salespeople tend to scale up with the number of feet you have on the ground. If you pay salaries, every employee increases your cost structure. If you depend on commissions, employees pay themselves or go hungry.

You can see this in an extreme form with car dealerships, where the salesmen are usually 100% commission. It's common for dealerships to have a half-dozen salesmen loitering on an empty lot, because they don't cost the dealership anything.

thekevan• 15 years ago

Sales guy and coding hobbyist here.

My snarky answer to this is if a software guy wants to get rid of commissions, he shouldn't complain when I client gives him a mock up in Word.

My serious answer is the problems his sales department had were symptoms of a broken system. Many easy, smaller fixes could have alleviated the boiler-room atmosphere he describes.

absconditus2• 15 years ago

I find it a bit baffling to see so many comments defending commissioned salespeople with claims that most of the major problems with commission are due to improper management or pay structure or this or that. Where are all of these magical salespeople in enterprise software sales who are knowledgeable, ethical and do not overpromise? One might even argue that this type of sales process leads to worse software as it becomes bloated with promised features, half of which are never used.

rrrgggrrr• 15 years ago

asdfghjkl;

pbreit• 15 years ago

Fogcreek doesn't seem like the best proxy for a "normal" company. Would this work on a broader basis?

earle• 15 years ago

This is just an absurd argument. You're paying top sales people commissions because thats what top sales people demand! You dont have a choice in this matter if you want real world class sales people -- you'll be giving them more than just commissions!

nickswan• 15 years ago

It seems through all of this everybody is forgetting about the customer!? I'm interested in knowing if a commission based scheme for the sales team has ever worked out well for the end user/buyer?

Why do we pay sales commissions?

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