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The Almighty Buck Businesses

Why Must You Pay Sales People Commissions? (a16z.com) 235

Posted by msmash from the perspective dept.
An anonymous reader shares an article: Sales is highly competitive work. That word -- "competitive" -- is the key to a high-performing sales organization. In order to be great at sales, you must outsell the competition. The competition might be a product from another company; it might be an internal project at the target company; or it might be the undying desire of the target customer to do absolutely nothing, which is often the toughest competitor of them all. At the end of the day, it's all a fight. And how do you get the most fight out of an organization? By offering a prize. As the old boxing saying goes, "This is prize fighting. No prize, no fight." Prizes and competition are critical to building a healthy sales culture. So what's an unhealthy sales culture? One that's governed by politics. Sales people must sell into highly political environments to succeed and that's why they don't want to live in one. If you do not evaluate and pay on what sales people sell, then what do you evaluate and pay on? Getting along with others? Kissing the boss' butt? Talking a big game but delivering nothing? Sounds like politics and sales people instinctively know it. When a CEO says, "we're going to evaluate you on things consistent with the culture" the sales person hears: "we are going to toss out objective financial metrics for the subjective will of the king." Great entrepreneurs are great innovators, and innovators love to innovate. But before you innovate on sales compensation, make sure you understand the strengths of the old system.
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Why Must You Pay Sales People Commissions? More

Why Must You Pay Sales People Commissions?

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  • Because they see the money (Score:5, Insightful)

    by gurps_npc ( 621217 ) on Tuesday September 12, 2017 @11:45AM (#55181531) Homepage

    When you hire someone to write code, they have no idea how much profit you are going to make off of them. Same thing when you pay someone to cook/wait/do carpentry/be a reception/ or do 90% of other jobs.

    But when you pay someone to be a salesperson they know EXACTLY how much income they generate. It's not that hard to estimate how much profit they are earning for the company. This puts them in the single best employee/employer bargaining position.

    So bosses HAVE to give sales commissions. Otherwise all the good salespeople quit and move to the competition who is willing to do it.

    Salespeople have the best leverage, so they get the best deal. In exchange they have to give up safety. It's single most capitalistic employee job.

    • Re: (Score:2, Informative)

      by whoever57 ( 658626 )

      But when you pay someone to be a salesperson they know EXACTLY how much income they generate.

      That's true, but not the complete picture.

      In general (VC funded startups excepted), what is important to a company is profit, not revenue. A sale person who increases revenue simply by agreeing to lower prices and hence at reduced profit is not so valuable to the company.

      This is a very important concern in software companies, where the cost of manufacturing is zero, yet, customers must pay enough to support future p

    • I agreed that salesman/saleswoman should get commission as a motivation to do the job. If there is no motivation, why would a person try to do his/her best for her job? However, I am not going to get into abuse of the model though (for both not enough commission and overly promises) because that would be a completely different topic.

      I actually agreed with the other poster that TFA is a troll. Just because TFA has the word "engineering" in it -- comparing engineering with sales job -- it should not be posted

      • Re: (Score:2)

        by Durrik ( 80651 )
        You also have to structure the commission right. I worked for a company that bought another company that had just straight gross commission for the the sales people. That company was losing money which is why they were bought. It turned out a lot of the problems were caused by that commission structure, where the sales people did everything to get the sale together, including marking the product down so that it was sold at a loss and offering free support. They didn't care about the profitability of the

    • Salespeople have the best leverage, so they get the best deal.

      It's not just that. As you mention, you can easily see how much money a salesperson is bringing in, which provides a simple metric of job performance. Providing incentives for job performance is generally difficult because there aren't good metrics.

      If you were to pay a programmer based on the number of lines of code they write, then their incentive is to write a bloated program with a lot of lines of code. They can game that metric, which isn't good. If you waiter simply based on how many tables they s

      • Re: (Score:2)

        by sfcat ( 872532 )

        If other roles had such a direct metric that was equally hard to game, I think you'd see more economic incentives being tied to those metrics. For example, I might expect that factories have some kind of incentive based on the number of units a worker can produce that pass QA. It's a pretty good metric of performance that's hard to game.

        Its easy to game. Most systems are. In this case, its about promising the impossible and giving away freebies on the backend to make up for it. I've worked at many places where many specific customers went from being profitable to unprofitable due to sales people trying to increase sales but not giving a shit if the entire sale ended up being cash flow positive to the entire company. I've seen it more places than I haven't see it.

        Basic rule, if you don't know how to game a system, you probably just don

    • Yeah bullshit. I've seen sales sell things that cost the company money, yet they get the bonus and the Hawaii trip. Fuck sales.

  • Sounds like whining to me (Score:3)

    by mamono ( 706685 ) on Tuesday September 12, 2017 @11:48AM (#55181569)
    Just another example of stodgy people trying to hold on to antiquated business models. I agree people should be compensated for their work. However, there is a plethora of available information out there now. I heavily research most everything I buy and already know what I want when I come in to the store. By the time I pick my product I'm more interested in the best price.

    • > I heavily research most everything I buy and already know what I want when I come in to the store.

      Great, you, I and many people like us all do that. What about the other 90% of the population? Many people buy many things they know little or nothing about in part because they have no idea how to do that research themselves. That's the segment of the market that salespeople are useful for. And many of those salespeople are experts in the application of their product, especially in niche stores. You

      • That's the segment of the market that salespeople are useful for.

        That's the segment that salespeople will heavily exploit. Commissioned salespeople will exploit them even more energetically.

        • Sure, but what's the alternative? People buying shit at random and hoping for the best?

          • Re: (Score:2)

            by sfcat ( 872532 )

            Sure, but what's the alternative? People buying shit at random and hoping for the best?

            Sure, its essentially what we have now anyway. And it would encourage people to get better at researching products which will over time improve engineering and product quality.

          • Buying at random or buying the garbage the salespeople are incentivized to move?

            Neither gets you what you need.

            If you need advice, find someone you can trust.

    • Absolutely and you seem really well informed on your choice of phone. But hey, did you know they developed a new type of case that will never break and are on sale for $10 vs $20? And we match those other guys price PLUS you can get a $300 smart watch on a promo right now for $5 if you get a $30 microsd card with your phone and you need one anyway right? Oh hey, did you know the manufacturer warranty doesn't cover the screen? You did need a screen protector ($10), right? Oh and a protection plan because wat

    • Re: (Score:2)

      by Rakarra ( 112805 )

      Just another example of stodgy people trying to hold on to antiquated business models. I agree people should be compensated for their work. However, there is a plethora of available information out there now. I heavily research most everything I buy and already know what I want when I come in to the store. By the time I pick my product I'm more interested in the best price.

      The submission is desperately trying to justify a business model that customers actually hate and work counter to their interest. We're not likely to buy that shit, but the VC is certainly trying as hard as he can to argue that everyone from the customer to the employee is actually happier with the sales commission model. Here's the reality:

      Employees hate the sales commission model, because your 'employees compete with each other' leads to a low salary, high stress job for the salesperson.

      Customers detest t

    • Yes, and you won't see a typical sales person. The article is talking about selling products to an organization (a company, hospital, government, charity, social club, etc). They don't walk into the local computer store to buy a networking solution, and they don't shop online for a payroll system, and they don't search Amazon for new drug delivery system, and they don't head to Crazy Freddy's Auto Emporium to buy a fleet of delivery vehicles. Even for consumer goods, they're most oftennot being sold to i

  • Like other commissions (Score:4, Insightful)

    by sanf780 ( 4055211 ) on Tuesday September 12, 2017 @11:51AM (#55181585)
    How about we compare sales commissions to a common one in the US that is paying the waiters and waitress with tips? After all, the costumer is paying either directly through tips or through sales commissions. I imagine it will put a lot of stress not to have a steady income like I have. Also, I do not get hefty bonuses either.

    • This is the ideal example. There are restaurants even in the USA which do not permit tipping. But in order to retain employees in such an environment, you have to offer them something else, like decent pay and maybe even benefits.

      If you pay salespeople sufficiently, then you can probably retain them. But then again, if your competitor is offering a percentage of the action... I'd say competition for the most competent sales people is half the reason why you have to pay salespeople a commission. The other is

      • And how exactly would it be lawfull to prohibit tipping?
        When I worked (on minimum wages) in a bar, I usually made more money from tips than from the wage.
        And in Europe as a part time worker you hardly get more than minimum wage. To have a decent (not big, nut ok) wake you need to be sallary employes. And even then, no one has any leverage about tips. The worst that can happen is that the tips are pooled, shared with the kitchen and guys on the tap, and redistributed to the 'walking force'.

        That a boss can de

        • Same deal all over, pretty much any "all inclusive" resort or cruise is going to have a policy to fire staff that accept tips.

        • And in Europe

          As in Europe the country? Which part of Europe is that, that bit in the middle where it's customary to tip 10%, that bit a few hundred km in one direction where it's customary to tip just enough to not get spare change, or that bit a few hundred km in the other direction where people are paid a living wage and tips are not only unheard of, you get strange looks if you offer them usually followed by getting your change back.

        • And how exactly would it be lawfull to prohibit tipping?

          Worker protections. When tipping exists, employers can abuse employees by offering criminally low wages. In addition, it's false advertising as it misrepresents the cost of the product/service. If gratuity was made illegal, employers would have to pay their employees better wages, and in addition, prices would reflect the real cost of the product.

      • "But then again, if your competitor is offering a percentage of the action..."

        They'll stop the moment their major competitor isn't doing so because not paying that commission means you you can take the difference as profit and beat them on the stock market or undercut their prices aggressively thus increasing sales while maintaining the same profit margin which increases profits and beats them on the stock market (stock price is what companies care about, not profits).

        This is how every major industry works

    • Companies will only pay sales commissions because they have to. I've seen a mortgage company try replacing its sales staff that with much cheaper salaried employees, but the salaried employees completely failed to sell anything during a peak market (probably because those salaried employees were too afraid to break the law with the puny salaries they received).

      On the other hand, when Kinkos decided to stop paying commission to its sales force, all the enterprise relationships had already been established by

  • Motivation (Score:5, Insightful)

    by Thyamine ( 531612 ) <thyamine@NOsPAm.ofdragons.com> on Tuesday September 12, 2017 @11:54AM (#55181615) Homepage Journal
    Isn't it really just about motivation? Every role has different motivation. Some benefit from additional compensation. Think about bonuses for meeting certain goals, or for being utilized a certain percentage of the quarter, or make a certain number of sales. A good organization understands what motivates their employees and matches it to business needs. Would it be great if we could all just be paid a nice wage, do our jobs well, and go home? Sure. But there are people who will slack and do the absolute least, and there are people who will see a bonus/commission/etc as a great objective to shoot for.

    Coming from an engineer background, I think we often harass sales people since they are the non-technical ones in our teams, but we all have our own version of this.

    • Re: (Score:2)

      by tomhath ( 637240 )

      Isn't it really just about motivation?

      No, it's about metrics. You can't reliably measure how much value most engineers or teachers add to an organization. But good salesmen are like star athletes.

      • They go hand in hand. Everyone has metrics to measure their performance. Those metrics are used for compensation for some roles. In bad situations those metrics are subjective or poorly chosen. Hopefully they are well chosen, with good milestones, and not arbitrary (lines of code) or subjective (you didn't try hard enough).
      • "No, it's about metrics. You can't reliably measure how much value most engineers or teachers add to an organization. But good salesmen are like star athletes."

        Bogus metrics. Star athletes are rare. Pretty much anyone with social skills and poor ethical radar has the talent to qualify as a sales star. The problem with sales goals and commissions is they credit the salesman with the sale. The top sales people simply didn't fuck up the first few deals, so were given bigger leads and/or had those first few cl

        • Re: (Score:2)

          by Altrag ( 195300 )

          You could put the same argument toward the star athletes though -- they get some early goals so they get played more giving them more chance to score goals in future and so on.

          Being a professional athlete in general obviously takes enormous amounts of practice, talent, skill and simple willpower. But the biggest difference between the "star" of a team and the next guy in line is often just the amount of play time. Sure there are exceptions where the star is truly leaps and bounds above everyone else not o

    • "and there are people who will see a bonus/commission/etc as a great objective to shoot for"

      Sure, but you can tie a variable salary or bonus to performance for sales without paying out massive commissions scaled to the deal. In reality marketing is doing more to bring you those sales than the actual sales people.

      • Re: (Score:2)

        by Altrag ( 195300 )

        That depends entirely on your business. For consumer-facing products that are marketed in brochures, giant in-store billboards, TV spots, internet ads, etc then sure -- the marketing has done the lion's share of the work and the salesperson is really just trying to sell you extended warranties and other add-ons. Of course, their commissions tend to reflect that fact (so they might get a decent percent commission on an extended warranty, but a small or zero commission on the base product.)

        With the push-bac

  • Even a "Sale" means different things, complicated (Score:5, Interesting)

    by Faizdog ( 243703 ) on Tuesday September 12, 2017 @11:56AM (#55181637)

    I once worked at a medical diagnostics startup where I got a really interesting view into the world of sales. I was the technical individual responsible for training the sales team ( I knew the tech and was good at explaining it in laymans terms). I also went out with them on sales calls. Very different from what my real job was, but I learned a lot about a different world.

    In any case, these observations are obviously limited to that particular experience, but I think can generalize.

    The sales people had territories. There was also always fighting about what was in which territory, if you had a major cancer center in your area, you had more chance to be successful.

    Now a "sale" was when a doctor ordered our medical test. The sales people had commissions on those sales, and the plans changed over the years, but usually there were tiers, 0-X tests, commission is one number, X-Y tests sold, different (I think higher but forget) commission, etc.

    Now what does it mean for a test to be sold. Is it simply that the doctor ordered the test and their staff sent in the form to our lab?

    We were trying to get reimbursement with insurance companies worked out. What if we didn't get reimbursed on that test? It's a loss for the company, but the sales person sold it, their job is done, reimbursement is a separate departement. What if though the reason we couldn't get reimbursed is because the test is not very useful clinically for the patient, but the doctor ordered anyway because they were friends with the sales person, or she was very pretty? Now it's a potentially bogus sale.

    What if it's a legit sale, and clinically valid, but the patient's sample due to some wetlab processing issues can't have our assay run on it, so we don't make money?

    What if we get the order form for a "sale" but never the actual specimen? Is it still a sale?

    We spent months and years dealing with these and other issues. It was always very complicated, especially since we were a startup in a somewhat new area, so all the rules or "industry standards" were defined.

    Again, very specific to our situation, but provides an example of how a "sale" has different definitions, and sales people want their commissions.

    For another, say software product, a sales person may sell, but there is a 3 month evaluation window. They could argue hey I got the foot in the door, I did my job. You make a sucky product and the client won't keep it, or our customer reps can't improve service. For the company, that's not a true "sold" product bringing in revenue, but the sales person did the job they had.

    At the end, our startup went out of the business, partially due to the fact we spent A LOT of money on sales commissions for orders, some which were invalid or our reimbursement team couldn't get insurance to pay for.

    • I never understood compensation plans that did not take into account profit.

      Sales commission should be based on profit after expenses.

      That takes care of all the problems mentioned above.

      Sell a product or project at 35% margin, but turns out at the end to have only generated 22% margin, then your commission is a % of the end profit, not the sales revenue.

  • Greed is King (Score:5, Insightful)

    by crashumbc ( 1221174 ) on Tuesday September 12, 2017 @12:01PM (#55181669)

    Sales commissions are used to breakdown moral conventions using greed. A person might not be willing to normally lie to a client or sell them some shit they don't need. But once they get used to the bonuses, they'll do anything to keep them coming in.

    • You don't sell when you are not hungry.

      I dont want sleazy sales men on my team, but I do want ambitious, hungry human beings who will go out there and hustle.

      They are paid on profits though, not revenue. This prevents them from making slimeball deals and hurting the company in the long run.

  • I guess MS decided to go with a retro look today, green to represent the commissions part of the story? #slownewsday
    • Of course, it's a slow news day. Everyone is watching the Apple press event. Expect a flood of stories after the event.

      • Re: (Score:2)

        by dstyle5 ( 702493 )
        Not that slow, J.J. Abrams signed on to direct Episode IX today. I think that is much more relevant to Slashdot's readers than the sales guy commission 101 post.

        • Not that slow, J.J. Abrams signed on to direct Episode IX today.

          I was hoping the George Lucas would direct Episode IX and have Jar-Jar come out of carbonite to bring balance to the Force. :P

  • #1 For people who are confused, i'm pretty sure this is referring to corporate sales where they're trying to convince another corporation to buy their company's product instead of a competing company's product, which is in fact an important job. Not the salespeople at retail stores trying to convince individuals to buy an appliance or get the extended warranty, who can suck it.

    #2 I'm usually pretty lenient about such things, but why is this on slashdot? It doesn't seem to have any direct connection to tec

  • Getting paid for being good at your job (Score:5, Insightful)

    by Anonymous Coward on Tuesday September 12, 2017 @12:35PM (#55181903)

    Most jobs give zero benefits for being good at what you do. Lousy or amazing, your monthly paycheck is identical.

    “Peter Gibbons: The thing is, Bob, it's not that I'm lazy, it's that I just don't care.
    Bob Porter: Don't... don't care?
    Peter Gibbons: It's a problem of motivation, all right? Now if I work my ass off and Initech ships a few extra units, I don't see another dime; so where's the motivation? And here's something else, Bob: I have eight different bosses right now.
    Bob Slydell: I beg your pardon?
    Peter Gibbons: Eight bosses.
    Bob Slydell: Eight?
    Peter Gibbons: Eight, Bob. So that means that when I make a mistake, I have eight different people coming by to tell me about it. That's my only real motivation is not to be hassled; that, and the fear of losing my job. But you know, Bob, that will only make someone work just hard enough not to get fired. ”

    • Re: (Score:2)

      by aktw ( 4857131 )
      As a business owner, I've found that most people consider themselves good at what they do -- even if they're not. It's sort of like driving; everyone thinks they are a good driver, and complains about the other drivers around them not using blinkers or going too slow/fast or checking their cell at a light, etc.. Anyway, I don't think that commissions or metrics-based incentives are a great answer for most companies, but I do think we need to adjust this whole "pay me more" attitude that people have in reg

  • This salesdouche says "Prizes and competition are critical to building a healthy sales culture."

    If "building a healthy sales culture" means "encourage salespeople to treat the customer as a mark" (as commissions tend to do), then I vote for an unhealthy sales culture.

  • Wouldn't I be better off making purchasing decisions in a low-pressure and high-information environment like the Internet? My grocery store does fine without having to have a sales person follow me around and convince me to buy oranges or maple syrup.

    Having a sales person does make a business a lot more money, which is why they do it. But as a consumer I need them about as much as I need mosquitoes in the ecosystem. (which is to say, easily replaced and non-vital)

  • "Heathy Sales Culture"? (Score:5, Insightful)

    by idontgno ( 624372 ) on Tuesday September 12, 2017 @01:18PM (#55182219) Journal

    I've got your "healthy sales culture" right here [wikipedia.org]. Quantified. Metrics-based. Competitive. The textbook case!

    Maybe we can compete to sell the anonymous submitter a fire to die in.

    • Re: (Score:2)

      by trawg ( 308495 )

      Every sales commission process should be put in front of a bunch of 15yo video gamers to see how they would game the process to their benefit before it is deployed in the real world.

  • I've not dealt with sales engineers lately, I use this term for sales people that deal primarily with technical products for technical people. I'm thinking back in the days before internet there were some sales engineers that were very helpful, i.e. Jim from HP (back when HP was HP) on instrumentation controllers and he kept me informed of what products will work for me and which ones will not be applicable. At times I wonder how he ever made a profit but then when purchases are made, however, a lot of mone

  • Best buy had non Commission / Commission system.

    As in you get hourly but if you want good hours you need to up sell ripoffs.

    circuit city was Commission and then they fired all of the good sales people and replaced them with lower prided ones and sales went down.

  • You can pay them a salary, or a wage at your option... the only requirement being that it is an amount compliant with local minimum wage laws.

    You incentivize the employees to sell as hard as they can in such a case with non-monetary perks for each month, such as the right to pick their own shifts for the upcoming month.

    Obviously, employees that fail to sell well enough to justify the expense of paying them are terminated.

    • Re: (Score:2)

      by mark-t ( 151149 )
      Dangit... I really wish slashdot had an edit button for at least a minute or two after posting. I meant to suggest that such a perk would be for the top seller each month.

  • In the enterprise software business all sales people are commissioned. Except for the ones we had at my last employer. We recognized that sales is hard, competitive and requires special work. At the same time, the key element that wins a deal might be a developer working all night to sneak a feature into a demo or build a new demo environment.

    So why do you pay the sales guy a huge commission check for doing his part and the developer her normal salary if the developer was the one with the heroic effort?

    You'

  • If a company is capable of simplifying their product lines enough and delivering a clear advertising, then the traditional sales position is dead. I can't stand talking to salespeople, especially tech salespeople, so that would be a huge positive for me. I've never bought anything based on the recommendation of a salesperson, and don't know people who have. In IT however, CIOs tend to be extremely gullible when it comes to software and hardware sales pitches. It has something to do with all the free dinners

  • I have developed a healthy distain for sales people of all shapes and sizes. On the rare occasion where I have met an honest one they rarely last very long. From my viewpoint, the sales subculture is little more than a snake pit. Tell the customer whatever you think they want to hear, whether it is true or not, and make the sale. Get them to sign on the line that is dotted.

    After the sale is made they are gone.

    Two industries where sale people provide no value whatsoever is cars and homes. Both have legal pro

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