Are sales people different from you and me?

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"Sales people are different from you and me."

"Yes, they want money more."

A year - a few months, even - ago, I would have agreed with this. It's common knowledge that sales people are motivated differently to the rest of us. You need to keep them hungry, drive them with low basic salaries and hefty commissions. The best sales people are not only hungry, but greedy too. Harnessing that greed is the key to succeeding in sales.

Unfortunately, like much common knowledge - that we only use ten percent of our brain, that if you build a better mousetrap then the world will beat a path to your door - it's wrong.

Simon (the other founder of Red Gate) and I believe this so strongly that we've stopped paying commission to all our sales people.

We've experimented with sales commissions for the best part of a decade. We've never found one that really worked. Every compensation structure can be gamed, and has its unintended consequences. Pay people a percentage above a target and you encourage a sawtooth pattern – there’s a pressure for sales people to undersell one month and save up the sales for the next month. It makes more sense to be 25% under target one month and 15% over target the next month rather than being 5% under target each month. You can fix this - you can play around with the thresholds, add ratchets and fiddle around with commission debt – but the compensation structure gets increasingly complex.

The ancients believed that the earth was the centre of the universe and that the planets and stars rotated around it. This didn't quite fit the facts, so they shifted the centre of the universe slightly off the earth. There were still discrepancies between theory and observation so they put the planets on circles within circles: Venus didn't circle the earth, but it circled a circle that circled the earth.

That’s what our sales salary system felt like – a gigantic, complex and medieval spirograph centred on an assumption that wasn’t true.

So we decided to fix it. First, we tried to persuade our business unit heads to stop paying commission. “Interesting idea,” they told us. “We think we should try it, but not right now. We’ve got our hands full.”

Jeff Immelt, CEO of General Electric, once said “when you run G.E. there are 7 – 12 times a year when you have to say ‘you’re doing it my way’. If you do it 18 times, the good people will leave. If you do it 3 times, the company falls apart.”

Red Gate is several orders of magnitude smaller than GE, but the principle still holds. Occasionally – once or twice a year – Simon and I need to be dictators. So we stamped our feet and told our business unit heads that we were tearing the old system down. From October 1st we wanted all our sales people to be on flat salaries.

We managed to get everything in place a month early. Now, towards the end of September, the system has been running for three weeks. So far the signs are good.

It turns out that fear is not a good motivator. Sales people have mortgages to pay, kids to feed and bills to settle, just like the rest of us. Would the anxiety of not knowing whether you'd be able to eat at the end of the month help you code better? So why would it help sales people sell better?

Removing commissions allows sales people to behave in more complex ways. Sure, we want sales people to sell more stuff, but only if it's right for the customer. As a business, do we prefer to sell $100 of software today or $200 of software tomorrow? It depends - on the likelihood of tomorrow's sale falling through, on whether we'll make that sale anyway, on many other things. We need our sales people to weigh up complicated situations and make decisions based on their judgement as to what the right thing to do is. Any sales commissions scheme we could come up with would contradict these complexities.

Sales is no longer a zero sum game. Oversimplifying, in any month there are a finite number of leads we can contact; a fixed amount of money to be made. One sales person’s gain is another sales person’s loss. Imagine you could construct a sales robot, programmed solely by the rules in any sales structure. How would it behave? It would steal deals off other sales people, sell customers software they didn't need, argue with its boss over its commission and backstab its colleagues. That wasn’t the behaviour we wanted, but our commission structure sent a strong signal that it was.

Now that we’ve removed commissions, sales people are sharing more. If Alice is off sick then Bob will cover for him. If Bob is dealing with a customer that Alice would be able to help better, he’ll hand him over to her. If Alice’s product knowledge needs improving, she can spend some time away from selling. None of those things were happening before.

By removing the simplest, crudest and least effective motivational tool of money, we're forcing our managers to find more powerful, subtle and productive techniques to motivate our sales people. Rather than relying on carrots (sell more and you can buy that new car) and sticks (don’t sell enough and you won’t be able to feed your kids), we are compelled to make our sales people’s work more interesting, to set better goals, to encourage more teamwork.

We’ve removed an enormous amount of management overhead. We no longer have to spend so much time setting targets (sure, we still set targets, but it’s not so important we get them right); we spend less time deciding who worked on which deal and where the commission should go; our managers can spend less time fiddling with spreadsheets and more time making their teams hum.

The idea that sales people are different to the rest of us is based on what psychologists call a fundamental attribution error. We tend to explain other people’s behaviour’s differently to our own. For example, I was late this morning because my alarm didn’t go off. But you were late because you’re lazy. In the first case, I blame the situation. In the second, I blame your personality. Similarly, I come to work because I love what I do. But you – and sales people – come to work because of the money. I am motivated by interesting work, the chance to make a difference and recognition by my peers. But you are motivated by cash.

Of course, some sales people do their jobs not because they enjoy them, but purely for the cash. Those people will, over time, leave. And that will be a good thing, for Red Gate and for them.

But, on the whole, sales people aren’t that different to the rest of us.

Enjoyed this post? Follow me on Twitter (I’m @neildavidson)

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Comments

[David Locke]

With full salaries and no commissions, you don't necessarily need to split your hunters and farmers. I've seen a sales rep drop a retained customer who called wanting something, because that customer was worth less to the sales rep, while that customer was worth more the the company, because of the lower cost of sale involved.

[John]

It has always amazed me that if you sell something you must by on a commission. To agree by comparison; it's always a pleasure to eat at a restaurant where tip is included in the price AND the establishment is run in such a way that waiters are still friendly. Well done for trying something new - hope to hear it's still successful 6 months down the line.

[Cameron]

I've thought about this quite a bit too, and I'm curious how you came up with the new compensation structure, especially since you were already operating with a base + commission structure.

Presumably you had to increase the base salary, or it would have just been a win for you, and a lose for the sales staff. But how much? If I consider two salespeople, one who's been consistently making 50% of their salary via commission, and one who's been making perhaps 25%, do they end up with the same new base, or do you adjust the base according to the historic performance of the salesperson?

In the former case, you're either screwing the high performer, at least in the short term, or you're just increasing your costs with no obvious benefit. In the latter case, you still have a commission structure, but it's only evaluated at annual review time or whatever.

I've struggled with this myself, and the biggest problem with commissions, is that the size of a software sale can be so ambiguous, especially if there's an element of consulting in the mix. ("I sold a million dollar contract!", "Uh, yeah, but we're going to have to do 1.5 million worth of work to deliver it. Thanks for nuthin.")

[Neil Davidson]

Cameron,

We came up with salaries that were higher than the base rate but lower than the previous base rate + commission. We looked at what we felt was a reasonable salary (benchmarked against other companies, for example) to influence our decisions.

If you have a high performer you can pay him more money, just like you'd pay happy paying a high performing software developer more than a low performing software developer. But you have the freedom to decouple this from just the amount of stuff the sales person sells. Sure, this is one factor, but you can take into account team behaviours, attitude, work ethic, whatever you like. It becomes a (evidence-based) judgement call, just like it is for everybody else in the company.

Neil

[Justin Goldberg]

Ken Olson (founder of Digital Equipment Corporation) didn't believe that a salesperson (and his family) should have to depend on commissions for his livelihood. Which was quite different from what everybody else was doing at the time. Source: "The Ultimate Entrepreneur: The Story of Ken Olsen and Digital Equipment Corporation"

[Grok2]

Would you recommend the same approach if, say, every product you sell was priced in the tens of thousands of dollars (potentially, in a good year, salesmen can make an exceptional amount of money if on commission). In this environment of high product prices won't you find it hard to recruit good salesmen?

[Matthew Glidden]

I like the idea of de-coupling commissions from sales because it changes both the perception and personality of the job itself.

Some folks like the idea of solving customer problems, but would never take a normal sales job because they dislike being seen as a money hunter. Releasing this "pressure" by eliminating commissions should widen the scope of potential employees, and who can succeed doing it, even if you don't catch the attention of traditional salespeople.

[Derrick Colburn]

You've applied the wrong solution to a problem you quite clearly don't understand. This is as bad of an idea as deciding to pay programmers by the line of code when you think that they're not producing enough software.

* If your salespeople were gaming the system, then you had poor sales management.
* If you had to constantly shift goals, then you had poor sales management.
* If your sales people are afraid/anxious of not making sales, then they are not very good at sales.
* If your sales people were unable to feed their kids after a month of low sales, then you didn't pay a reasonable base salary.

Based on what you wrote, it sounds like you never had any real salespeople, just order takers who were paid whenever customers decided to buy. And since you just effectively gave them a paycut, any real salespeople you have will soon leave.

Or is it that you're saying the entire sales industry has gotten it wrong (and you've discovered this wonderful cure)? Or is it that someone RedGate/software companies are so special that the standard practices of sales don't apply?

I find this article to be very troubling. Is this the kind of advice we're going to get at Business of Software? I thought the whole point of the conference was to teach software people business... so they don't go doing crazy stupid things like non-commission sales.

[Neil Davidson]

Derrick,

I think I understand the problem fairly well. And I think our sales management is reasonably strong, but I'd definitely prefer its energies were spent helping our sales people, not policing them. Our sales people are good, but not knowing what your salary is going to be will cause anxiety for almost all people.

And I do think that what large parts of the industry does is a mismatch for Red Gate (and possibly downright wrong).

I'm not alone, by the way. DEC didn't pay its sales people commissions; the SAS institute (the world's largest privately held software company) doesn't pay commissions; my local Apple store doesn't). There is also a fair amount of academic research that shows that people don't tend to be motivated by money, and that paying commissions distorts behaviour in unhelpful ways. Google, for example, Hertzberg, or Jeff Pfeffer's work (eg here and here ).

Neil

[Neil Davidson]

Grok2,

If you can find salespeople who are motivated intrinsically (i.e. by the need to do a good job, to help customers, and who enjoy selling) and pay them a good wage then I don't see why not).

Of course, it depends on the type of culture you want to develop / have already developed.

Neil