Sales Commissions

post # 391 — June 21, 2007 — a Managing post

Here’s another reader question:

“We run a small-ish (just under 30 employees) but rapidly growing high-end engineering/manufacturing. company. In truth, we’re more a service firm than a manufacturer per se, in that we provide an enormous amount of guidance/advice and consulting services to our clients, in addition to the systems and other hardware that we produce and sell. We enjoy an excellent, almost cult-like reputation in the global marketplace for our products and depth of knowledge in this area.

“We’re doing our utmost to build a world class company, much along the lines of Jim Collins’ “Good to Great” and with key precepts from your work as well. We’ve read your exceptional book, “Managing the Professional Services Firm”, have internalized many of the insights and ideas in it, and have found it enormously helpful vis-a-vis our perspectives on running & growing the business. Truly a tour de force!

“The crux of this message is to ask for your recommendations, if any, in regard to an intelligent commission or bonus arrangement that we can implement for our sales/advisory staff. We currently have our 3 main sales guys on salary as we’ve wanted to compensate them as generously as we can but don’t want them feeling like they have to either punch a clock or as though their income is going to rise or fall on a given transaction.

“Essentially we want them to work with our customers and each other in a fashion that engenders a healthy cooperative environment in the sales office and rewards them both individually and as a group for attaining departmental goals. Each one holds his own admirably on all levels, and as the company grows we want their income to grow commensurately with sales revenues.

“They also do a pretty fantastic job in general within our office operations and so our objective is to structure an arrangement that provides meaningful incentives to them as individuals and as a group without fostering an overly competitive tone. Also oftentimes in this business it takes a collective effort on the part of all of them to thoroughly assess a prospective client’s needs, and performance objectives, and then to define the optimal means for achieving those objectives. What we do definitely requires a team of passionate and dedicated individuals.

“I have seen instances within other companies where management’s idea of a commission set-up ended up pitting the members of the sales team against one another, sometimes with pretty disastrous results. And customers could immediately sense the overly aggressive and protective attitudes on the part of the sales people (as in “hey, he’s MY customer! And that should have been MY sale!!!) We don’t want anything to divide our team, we only want to implement a program that will reward them for working with one another and enable them to succeed together. We also want to keep things pretty simple and straightforward for everyone, management included!

***

Thanks for the kind words. I think you can guess my main response, which is that while, like the questioner, I believe in (generous) rewards, it is my experience that any explicit commission system which builds in incentives for particular things will lead people to ignore anything which is NOT included in the system. So, especially since you are of a small scale, I’d keep it personal and human and judgmental (non-formulaic) as long as possible.

That means, working with each person regularly to discuss objectives, challenges, and needs, and also holding regular team sales meetings to solve common problems and learn from each other. The only incentive your people should need is the absolute confidence that you’ll play straight with them and be fair — if they truly contribute in ways that produce results, you’ll reward them.

And here’s the key, obvious point: if they don’t trust you to treat them fairly, no incentive scheme is going to work. So, keep doing what you’re doing.

(I did a podcast about this, called “You Cannot Manage Through Pay Schemes.”)

*****

Does anybody else out there have a different point of view? For example, if this logic is correct, why do we see so many sales commission schemes out there? Are there good ones to consider?