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Passion, People and Principles

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?


Mark Graban said:

David, I agree wholeheartedly with what you’re saying. I’m a disciple of Dr. W. Edwards Deming, who used to preach against commissions and incentive systems. I did a podcast interview with Eric Christiansen, the CEO of a company that did away with sales commissions. You can hear him speak about his experiences (positive!) with that at about 7 minutes into the podcast, accessible here at this link.

posted on June 21, 2007

Mark Graban said:

He actually starts talking about the commission structure 4 minutes in.

posted on June 21, 2007

Carl Singer said:

Quoting General Eisenhower — you can’t push a string — that said, if you want your sales TEAM to act as one then consider a team commission structure where all or most of their commission revenue is based on team (total) sales vs. individual bookings.

This, of course, has drawbacks, too. “I worked harder than Johnny did but he’s getting paid as much as I am.”

Remember any situation where employees are aware of and focus on each others salaries tends to be volatile.


posted on June 21, 2007

CA said:

I agree with you David. I have been guilty of devising a sales commission scheme myself in the past. I think the fallacy here is our thinking that A: Sales is the only important function in an organization and B. Sales people are motivated by money alone. Hence we see sales schemes either with a low base salary or none at all, and let sales people earn a compensation they want. It may have worked in the past, but this scheme presents a number of problems in today’s business environment.

Businesses need relationship builders today and not just sales people. For example, if your business values and believes in Customer Lifetime Value then your support people are as much to share in retaining a client as the sales person. Why, then, do we not have commissions for support people?

Annual profit sharing is one scheme that may provide a fair rewards structure for every one involved in building and retaining client relationiships.

posted on June 21, 2007

David Kirk said:

I’m a big believer in “you get what you measure”. However, one of my favourite quotes is that “When a measure becomes a target, it ceases to be a good measure”. And since purely formula driven systems are easily “gamed”, it is very easy for a smart, motivated sales force to do the calcs and realise exactly what they need to do to get ahead. Unfortunately, this often involves cutting others’ throats.

If you are still small enough to manage the complexity of a less rigid system, but still reward the sales team for their contribution (and make sure they are clear on what is required of them, which sounds to be the case already) then stick with a qualitative system. That little throw-away phrase in brackets may not be critical in this case, but if absent, will quickly lead to frustration and politics within the team. The expectations need to be clear even if the numerical calculations for determining the exact remuneration aren’t fixed in stone.

And to reiterate what David M said, if they don’t trust you to be fair, then the battle is already lost.

posted on June 21, 2007

David Krk said:

to CA – annual profit sharing doesn’t get past the problem of needing to recognise different contributions during the year… can easily lead to unhappiness itself

posted on June 21, 2007

Tom "Bald Dog" Varjan said:

Personally I believe the commission structure is almost singlehandedly responsible for ruining the reputation of the sales profession in general.

In 2004 the Gallup Organisation surveyed the population on the topic of trusting professionals in general. After politicians, salespeople turned out to be most distrusted and disrespected professionals. And popular movies like Sinclair Lewis’s “Babitt”, Arthur Miller’s “Death of a Salesman” and David Mamet’s “Glengarry Glen Ross” have moulded people’s perception about salespeople as glib, greedy, smooth-talking class act shysters. We’ve all heard the phrase, “If you can’t find a job, you can become a salesperson.” And people do their best to avoid them in any way they can.

Sitting down with a commissioned salesperson feels like going to a dentist who is also the part owner of a mercury mine. The agenda is given even before I open my mouth. Sell as many mercury fillings as possible whatever it takes…. or else.

The typical annual turnover of commissioned salespeople is 43%. How can anyone build an organisation knowing that a year from now half of their their – usually the best – salespeople are giong to work for the competition, doing their best to push their previous employees out of business and by stealing as many clients as humanly possible.

I believe in an organisation everyone should be compensated based on the same criteria. In the age of complex solution it’s plain retarded to reward the one person who “closes” the deal. How about all the others who assisted the closer?

posted on June 21, 2007

Cary King said:

There always seems to be a good deal of friction between the hunters and the farmers.

Those that spend a good deal of their time hunting cannot produce the same numbers of billable hours as the farmers – but, they bring the meat that the whole village lives upon.

The farmers, who very often refuse to do even small tasks to help the hunters, complain that they do the predominance of the “real” work. And, there are more farmers than hunters.

At the end of the accounting period, unless there is some fairly fixed guidelines, one group or the other will feel as though they are being short-changed.

Some sort of agreement needs to be in place, no squishy group decisions will suffice.

posted on June 23, 2007

Bill Dotson said:

David and the group:

I see different compensation schedules at each of my clients. They hire me to help them figure out the best method. Some believe there is a “golden rule” for how people should be commissioned.

Every company, and sometimes department, needs a system that works for all the players involved in growing the business (business developers, outside sales people and some inside sales), maintaining the business (inside sales, service, and project technicians), and managing the business (administration).

In all the years I’ve done this, I’ve never created one system that is a clone of any other. Personal and group culture and the company direction are the strongest factors involved in my work.

My 2 cents…

posted on June 23, 2007

David Kirk said:

Bill – I’d be really interested in a couple of contrasting examples and how you decided on the key ingredients.

posted on June 23, 2007

David (Maister) said:

Ans so say all of us! Bill, would you be willing to help us learn by sharing some examples, as David requests?

posted on June 23, 2007

Bill Dotson said:

David & David:

I’d be happy to. Allow me just a few days to put a short document together.


posted on June 24, 2007

Harry Alexander said:

Please enter your comment – We have a saying here at our management consulting firm Townson & Alexander “Show me a business person who is not paid to do something, and we will show you a person who will not do it.”.

So, when “it” is to sell more; produce greater profits; produce greater revenues; or any other result, “it” had better be tied to some kind of incremental incentive – compensation and/or rewards.

If not, get set for “business as usual”.

posted on June 25, 2007

CA said:

To David Kirk: I agree individual contributions need to be recognized. However, I would like to point out that outstanding contributions need to be recognized. When people are hired, they are expected to do their job anyways. A sales person is expected to bring in orders; a support person is expected to provide one call resolution (well, most of the time at least) and so on.

My question is – why should the sales function be put on a pedastal? Why not the support person or the development or manufacturing department? After all the goal of individuals in all functional roles is to ensure customer expectations are met or exceeded. Or is it?

Perhaps therein lies the problem: “Goal” means different things to different people. We may have subordinated company goals to individual goals. A mathematical formula can capture efficiency and numbers, but can it capture effectiveness?

posted on June 25, 2007

Greg Krauska said:

Why pay salespeople commission for performance? Because the most effective salespeople are driven by rewards and recognition, among other traits. Take commission incentives and opportunity to exceed quota away from top salespeople and most of them will migrate to firms who offer commission and high probability of success.

Get the commission % right, make it clear what a good deal looks like, what kind of cooperation is needed with other departments and the range of flexibility and creativity they get to exercise. Then, let them work the plan. They will figure out what matters most very quickly.

We all want our salespeople to have a balance between individual results and team/organizational performance. But never forget that sales is ultimately about creating consistent revenue performance. People self-select into these roles because they thrive on being goal and reward-oriented. If are not comfortable with that kind of thinking, ask yourself whether, as President of your company, you would want your salespeople working for your competition or “gaming” your commission plan?

posted on June 28, 2007

Bill Dotson said:

Hello again everyone:

I just posted two articles on compensation. The first is related to general compensation and the second is related to sales commissions.



I did not address the topic of politics because I believe a well communicated and understood plan will help limit politics. We’ll never be done with them completely.

Have a great weekend,


posted on July 1, 2007

David (Maister) said:

Thanks, Bill.

posted on July 1, 2007