In his blog on HBR, best selling author Dan Pink argues that paying commissions to sales people has a counter-intuitive effect of undermining enterprise profitability.
You can read his post @ http://hbr.org/2012/07/a-radical-prescription-for-sales/ar/1.
I would agree with him on most of his arguments. However, as with most theories, this theory has its limitations as well.
In my opinion, sales commissions work if the following conditions are true:
- The sales process is simple and involves only the sales person with no dependencies on any other colleague.
- There is no upper limit on the commissions that he/she can receive.
- Earnings via commissions (as a percentage of total earning) is substantially (> 60% ) more than the base pay.
- The sales manager’s pay is not commissions’ based.
Also, viewing this in isolation can lead us to wrong conclusions. There are many more conditions that govern the performance of any sales team. Some of the critical one’s are
- How does the organization set & measures goals for the sales teams?
- How long term is the organizations vision (does the sales team live month-month, quarter-quarter, year-on-year, etc). The shorter the vision, lower will be the profitability.
- Does the system penalize high performers for the low performance of others by expecting them to bring in more sales so that his manager can achieve his quota?
- Do you cap the maximum commissions that can be earned?
- How complex is the sales process for the products that is being sold?
- What is being measured & compensated via commissions (is it only the revenue or do you also measure things like % of revenue from existing customers, net new customers added, % of customer lost to competition)?
- Discipline of the senior management to exhibit predictable in their decision making (irrespective of the situation). For example, their discipline in approving discounts. IF they do not approve more than X% of discount during the start of the year/month/quarter, do they approve a higher discount at the end of the month/quarter/year just so that they are able to achieve their sales targets?
Answer to each of these questions can provide you a good view about the health of the sales team and if sales commissions structure that they have in place is really working for them or hurting their profitability.
