Sales Compensation

by john on April 30, 2003

In the May 2003 issue of Inc. Magazine, Norm Brodsky writes in The Sales Commission Dilemma:

Over the course of 25 years in business, I’ve developed my own system for handling sales compensation. I’ve also become convinced that the way most companies do it is a recipe for trouble.

I’m referring, of course, to the practice of paying sales commissions. Unless you’re very careful about how you use them, they almost always have the effect of undermining any sense of unity and common purpose in a business. How? By putting the salespeople in a separate category, by making them stand apart.

I like his model for moving to a salaried salesforce but personally I would take it one step further – to one accountable not only for revenue but margin as well.

First, a disclaimer. I’m not a salesperson and I’ve never been one. I don’t manage salespeople and I’ve never even hired one. I was a waiter once and could upsell with the best of them, but that hardly counts. But I’ve been involved in my share of 6 and 7 figure deals from both sides of the table and have worked and interacted with many salespeople of different levels, abilities and egos and I’ve learned enough to be able to form an educated opinion on the topic.

Brodsky brings up a number of salient points in his article. In implementing a few CRM systems I have been amazed at the difficulty that many salespeople have with centralizing their contact information. The 360 degree view of the customer is a myth until you can start getting people to share that information and for many people, usually in sales, that is anathema.

You also have to cope with the great fear all owners have that their salespeople will leave and take customers with them. That’s actually more likely to happen with a commissioned sales force than with a salaried one. For salespeople on commission, the customer represents security. As long as they have that connection, they think they have a means of earning a living. Consequently, they have a strong interest in making sure the customer belongs to them rather than to the company. They resist letting anyone else have a relationship with the customer.

If moving to a salaried model removes barriers to leveraging CRM or SFA systems then it’s a good thing. Brodsky makes clear in his article that moving to a salaried model takes time – when he hires salesreps he gives them the salary+commission plan they expect. After a couple of years he identifies the people he wants to keep and gets them to see the virtues of going all salary, which for Brodsky means an organization that works together for the right reasons, resulting in a more cohesive company.

If I had my way I’d want to compensate the salesforce based on the margin they bring to the business. At my company our divisions are measured on the contribution they bring to the business – the earnings they generate after expenses are taken into consideration. In such a model would you rather have a rep who hits his $1,000,000 quota with $100,000 in direct expenses or a rep that blows away his quota by $250,000 but generates another $300,000 in expenses by dragging an army of pre-sales reps across the country everywhere he goes? If I was a business owner I’m pretty sure I would want the former – but we tend to base our compensation plans on the latter.

I’m sure the argument is that those revenue dollars will eventually grow significantly larger at a cheaper cost since it is so much cheaper to sell to an existing customer but I would be cautious with that thinking. Maybe that worked in the late nineties but I don’t think it does now. Cautious growth with en eye for the bottom line will rule the day.

Brodsky’s model works for him, has it worked for others? Does anyone know of a company who holds its salesforce accountable for margin? I’d love to hear about it.

{ 6 comments }

Chris May 5, 2003 at 8:15 am

I’ve worked in the technology VAR channel – my commission was a percentage of margin on each deal. The problem was that margins in our business were rapidly approaching zero.

Scott Chaffin May 5, 2003 at 11:15 pm

After 13 years in sales, I’ve only seen one company that used a salaried model for salespeople, and it was run by a deeply Christian man who employed a deeply Christian work force. His top performers, brought in from other arenas, inevitably left for greener pastures, and he struggles still. He pays well, and he has a stable company, but growth is minimal. Works as long as you’re happy with the level you can operate at.

Salesmen are not salary-able, IMAO. Unless you can flip a switch and every salesman is salaried on the same day, there will always be those greener pastures, and they’ll take that Rolodex with them.

Having said that, I will read the article and comment further…

Henry May 8, 2003 at 11:26 pm

Like Zig Ziglar says, people will perform to the measurements they are judged against and with salespeople it’s revenue. Too bad companies are judged against net income…

Greg Genge October 8, 2003 at 4:16 pm

Our entire sales force is straight commission based on GP alone, and they set the price. It works really well, unless you have an account that requires significant engineering resources whereby the rep may start to get a disportionate amount of commission as compared to the entire effort required. There are a lot of things to consider, and there is certainly no right way, it’s all a trade-off. I am writing a management Consulting Project for my MBA at Queens, Ican let you know what I come up with of your interested.
Regards, Greg Genge, CEO, Dynavar Networking.

zeke December 27, 2003 at 9:56 am

Yeah, this Inc.com article is useless pie in the sky stuff. To pay salary to salespeople is ineffective in growing a business and not practical in the real world. I’ve had 20 years of experience now on both sides of the tech bubble and saw such measures being implimented. At the end of the day, some sort of commission is required, no doubt about it. This Inc.com clown needs to understand how the world really works, not who ideally it would in his dream company.

Pat May 15, 2006 at 8:10 pm

I need help on a graduate paper on computer sales reps compensations and where to find such info? Any help is needed on finding base salaries and commision rates. Thanks.

Please feel free to email me @ patcriswell@sbcglobal.net

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