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Would scrapping commissions make your salesforce sell more?

Aug 27, 2012 Business Daily, Management

“Some things in life we know are true. The sun rises in the east and sets in the west. A body in motion will remain in motion unless acted on by an outside force. And the best way to motivate salespeople is by offering them commissions.
But what if we’re wrong, at least about that last one? What if paying salespeople commissions is rooted more in tradition than logic? What if it’s a practice so cemented into orthodoxy that it’s no longer an actual decision? That’s what a handful of companies have begun discovering. To the surprise of many, these firms are showing that commissions can sometimes do more harm than good—and that getting rid of them can open a path to higher profits.”

DANIEL PINK Harvard Business Review (July-August 2012)

I have a lot of time for Dan Pink. His views on motivation in the workplace mirror my own, and I refer to his works often in my own talks and seminars.

I am convinced of this: the study of motivation has no simple formulae, not tried-and-tested carrot-and-stick tricks. People are complex beings. What makes them tick, lick or kick is not obvious.

In management and leadership, we should shy away from simple rules of thumb. If we want to get the most out of people, we must understand the nuances and subtleties of human motivation. The best way to do this is to study people, directly and in person. This should be backed up by reviewing the results of scientific studies and experiments in motivation.

Here’s one of those simple truisms: if you want to get sales, you give salespeople commissions. If you just give them a basic salary, they won’t have any motivation to sell additional units. So share it out: if they sell, the company benefits, and so do they. It works. Correct?

Not always. As Dan Pink will confirm, those sorts of ‘if-then’ (‘do this, get that’) rewards work, sure they do – but only for certain types of work. In particular, he tells us, they “work well with routine tasks social scientists dub “algorithmic.” Think stuffing envelopes quickly or turning the same screw the same way on an assembly line. The promise of a reward, especially cash, excites our attention, and we focus narrowly on getting the job done.”

For other types of work, however, if-then rewards fail. These are, in Dan Pink’s words, “complex, creative, conceptual endeavors—what psychologists call “heuristic” work. Think inventing a new product or working with a client to tackle a problem neither of you has confronted before. For those projects, you need a broader perspective, which, research shows, can be inhibited by if-then rewards.”

Back to sales. Is sales still a simple job in your company – does it involve making rote calls, using memorized scripts, using the law of averages to clock a sale? If so, commissions will work. But the world is different now. It’s hyper-competitive, for one thing: you can’t sell just by showing up repeatedly. And it’s hyper-connected, for another: customers often know more about your product and its rivals than your salespeople do.

In this situation, to use Dan Pink’s excellent phrase, you’re selling insights, not items. Mitch Little moved his sales force at Microchip Technology, from 60% base pay, 40% commissions, to 90% compensation in a high base salary, 10% linked to corporate (rather than individual) measures such as top-line growth, profits, and earnings per share. He saw total sales rise; cost of sales stay the same; attrition fall; retention rise.

Last year, GlaxoSmithKline scrapped commissions for US pharma reps.

Should you do the same? It’s your call. If you think selling in your industry involves creativity and lateral thought these days, treating your reps like commissioned automatons may no longer work.

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