Correlating Commissions with Happiness

http://meditations.seneca.systems/correlating-commissions-with-happiness/

by tyre • 11 years ago

15 10 11 years ago

meditations.seneca.systems

This is definitely a problem in many startups when the need for growth clashes with the emphasis on customer experience.

Thanks for sharing!

chipgap982• 11 years ago

Are you targeting $75k for sales people as the income level where happiness peaks?

tyre2• 11 years ago

Great question.

This post focuses on what commission structure optimizes for customer happiness.

We need to recognize that, especially in startups, early products aren't a perfect fit for everyone in our target market. That's okay, we just need to align incentives so that our sales team closes customers where the product can provide a Fuck Yes Experience.

In terms of general employee salary correlating to happiness, coincidentally I studied the philosophy and psychology of happiness so I'd be happy to shed more light here.

I think you're referencing the study by Daniel Kahneman.

Roughly $75k is the point at which additional income has severe diminishing returns, but it doesn't necessarily peak (you just see a tiny effect.)

That number is not as specific as it sounds. $75k was about what it takes to not have to worry about money. You can't drink champagne at every meal, but you have enough to live comfortably and sprinkle unnecessary purchases, travel, and vacation without additional stress.

It also doesn't control for cost of living. $75k in San Francisco isn't worth the same, in terms of quality of life, as $75 in Lafayette Louisiana.

Furthermore, within a given company, the absolute dollar amount matters far less than the comparative dollar amount. This[1] study demonstrates that people would rather be paid less money overall as long as they make more than their coworkers at a similar level. To combat this and to avoid horizontal discrimination, everyone at Seneca Systems who does the same job gets paid the same amount.[2]

[1] http://www.econ.ucsb.edu/~charness/tenure_papers/happiness.p...

[2] https://github.com/SenecaSystems/employee_handbook/blob/mast...

chipgap982• 11 years ago

Yeah I understood the message of the post was about lining up customers experience and commission, but the $75k number stood out to me. Wasn't sure if the title was getting at both ideas.

I like the idea of the FYE and putting a system in place where salespeople are encouraged only to onboard customers that are going to love Romulus right away. I've always loved that Brian Chesky quote.

And I've done a good amount of reading on the philosophy of happiness recently as well. I agree that the $75k is the not an exact figure. Another big point is that rough figure only accounts emotional well-being[1]. Its all depends on how you measure your happiness.

I haven't ready the UCSB study before, I'll have to take a look at that.

[1] http://www.vox.com/2015/6/20/8815813/orange-is-the-new-black...

djrogers2• 11 years ago

The equation of commission/OTE = FYE/TAM seems highly arbitrary. Why does the % of sales I close correlate to the % of my at-risk income?

Wouldn't a more direct equation be quota = FYE/TAM ?

If you're expecting your reps to close 20% of the leads they get, then set their quotas accordingly. Don't reduce their commission base - you're running a very real risk of dramatically under compensating your star performers, and overcompensating your dullards.

Quick example - Joe Slimeball only closes half the business he should, but he would W2 (according to your numbers) 67.5k. Sally Awesome manages to find a few extra customers and makes sure they are happy with your product (yeah - sales people should be doing that too, it's not all about the tech, there's a human side to FYE) so she closes 30% of her leads. Her take home (depending on accelerators) would be 82.5k-90k.

3x the performance, and a few $$ extra? That's great way to lose your best reps to other companies, and encourage the rest to idle along at minimum effort levels.

tyre2• 11 years ago

This is a good observation. If we didn't track metrics, we would end up paying a lot to under-performers.

Quotas, in our view, are correlated but slightly different and not a great way to encourage reps to close quality deals. Quotas are dependent on what we believe a rep should be closing.

If they are consistently not hitting their quota, we'll try to figure out why (not enough outreach, lower-than-expected conversion to demo or demo to purchase) and, if things don't turn around, they would be let go. Same as any other job.

In terms of compensation, our commissions are paid on a recurring monthly basis[1]. Consistently performing at a higher level means compounded growth of income. We based this on the excellent features of SaaS recurring revenue (stability + compound revenue generation) to further incentivize long-term sales thinking.

Also, as the product expands, that FYE/TAM ratio gets higher. So in a year or two, that commission/OTE ratio is different as we enter into a higher growth stage. That will encourage more outlier behaviour and make the differences between good and great more pronounced, but at this point we are small so that is less of an issue. We can closely track performance.

[1] http://meditations.seneca.systems/rethinking-sales-commissio...

djrogers2• 11 years ago

I hope it works out for you, but I don't work with (m)any reps who'd jump at that kind of deal. On your end, metrics don't fix the retention problem. On the reps end, you're missing a lot of emotional and phsychological drivers that sales people crave

1) no windfall opportunity - your rolling monthly commission eliminates any chance that someone is going to earn a six figure commission check by landing a whale. While most reps never or rarely pull that off, it is a huge motivator to both the rep who does it and his/her peers.

2) can you say handcuffs? A rep isnt going to want to get in to a situation where they know the only way they will ever get paid on the true LTV of all their customers is by staying with you until the company dies (not that it will). You might think this will improve retention, but t will also drive away a TON of good and great sales reps.

3) you're going to burn them out - using your example of a rep who closes (and gets paid monthly) on 10 new customers a year, your most successful reps are going to overloaded in short order. This leads to ignored customers and stressed sales teams. The normal way of handling this is to progressively cut a reps territory and/or account list, which works fine if they've been fully compensated for the customers LTV, but if you take half of someone's landed accounts off their monthly rolling commission you're going to have a revolt.

Again, I hope this works for you, but I have my doubts.

theodorewiles• 11 years ago

I agree that just equating Commission / OTE = FYE / TAM seems pretty arbitrary, I was unclear how this was "optimal".

In my understanding, commissions are used when effort is not observable but outcomes (i.e. closing a sale) are. An additional point in my head is that the commission / base trade-off is a decision that depends on how sensitive your salespeople are to risk.

I think you would really want to set marginal benefit to marginal cost. In this case, the marginal benefit of increased commissions would be incremental increases in effort and marginal costs would be incremental decreases in customer satisfaction or decreases in employee retention due to risk aversion. Of course, these might seem harder to quantify that FYE/TAM, but I think that the fraction of FYE is a little made up to begin with :)

quizotic• 11 years ago

"base salary is the amount you pay a salesperson to not close the wrong deals"

This doesn't mesh with my experience, but I love the phrasing. And it makes me wonder whether and how to reward walking away from a deal that could be closed, but would be problematic. I'm not smart enough to know how to do that.

douche• 11 years ago

Ah, yes, it's that wonderful time of the quarter when the salespeople are humping to hit their commission numbers, so we get inundated with arbitrarily scheduled demos and evaluations that have to be resolved right this second. Never mind that we've got our own schedule, with testing and development budgeted to get the next release out by the dates that have been promised to yet more customers and leads.

Some of the developers on my team haven't been able to get any real work done in two weeks because of this clusterfuck routine. Even better is when we're supposed to drop everything to expedite closing a deal, and then the contact on the customer side is taking a two-week vacation... I'm starting to realize that I should just not plan on anything happening during the second halves of March, June, and September. At least in December everyone is on vacation.

Correlating Commissions with Happiness

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