The psychology of sales force compensation models

There is one thing I can say with absolute certainty: there are so many different theories on compensation for sales reps in the market place, that it is hard to say with any type of authority what approach really works. Obviously all of them 'work' to a degree. In today's climate of escalating sales costs and compressed margins, what is the optimal way to extend psychological and monetary reward?

The three dominant compensation theories I will cover in these posts are: 1.) straight commission, 2.) salary + commission/bonus & 3.) salaried + annual raise. I'm also assuming that the companies have open territories.
If we are dealing with assigned territories the world looks quite different. Over the next week or so, I will give you my thoughts on these sales compensation programs. Am I 100% correct? No, probably not, and I'd love to hear your thoughts on the subject.

Straight Commission
Many straight commission jobs these days start with a draw or a 'clip-down' program. Some people argue that the draw immediately puts the rep behind the eight ball. Some companies realize that in today's market a sales rep won't be making them money in any type of sophisticated sales for six months at the very least (heavily relationship based sales up to two years). If they value training and quality new hires, then they understand that hiring a sales person is a long term investment. Or they don't understand that and they just continue to throw people at the problem until one of them sticks. My advice? Don't do that. Nothing will hurt customer good will as much as seeing a new sales rep every couple of months.

Now what can you say about the old-fashioned straight commission rep? A lot of senior sales reps I respect share a common characteristic: greed. Greed motivates them to work harder and excel. The old timers also tend to be quite eccentric and usually have a partially adversarial relationship with their employer. They are the mercenaries of the sales world and while many of them have been with companies for 30+ years they feel more like a contractor than an employee.

I wont ever forget the first time I really saw one of these adversarial relationships in action. An older rep came to a sales meeting with a copy of the previous month's orders in hand. Then, he went through his commission report line by line, meticulously checking each entry and the company's math. I must have looked stunned, but the rep just smirked and said that he'd been 'cheated' out of 10 dollars once and he was going to be damned if he ever let that happen again.

"Sales" for commissioned employees is as they are quick to point out "a contact sport." Sure, they'll go and buy the new guy a couple of beers at night, but if the conversation turns to shop and leads are discussed, these guys will run you over on the way to the A-list potential you were dumb enough to tell them about the night before.

The Positives
So while saying all this, why is it the time tested methodology for paying sales reps? It keeps the rep hungry: he has to work or he doesn't eat. The company takes very limited financial risks. A definite benefit of this compensation structure is that people essentially self-fire by not being able to provide a living for themselves. Want to keep your unemployment claims low? This is how. Your sales rep wants a raise? He can get one today by making a sale. You pay for performance and reps are paid for performance.

Psychologically this is the system where your reward center is tickled every day. Every day's performance brings rewards. Did you write $600 of commission today? Feels good doesn't? Want to keep feeling like it? Continue making it happen!

The Negatives
Unless you have a solid nestegg or support, getting into a straight commission job can be a very bad idea. You aren't guaranteed a salary. You could and you probably will spend days at the beginning working 12 hours per day and not earning a dime for it, and the next day you may work 3 hours making $500 that day in commission. That also explains why a lot of banks would rather not give straight commission sales reps with under two years under their belts a car or house loan. They are naturally risk adverse and you have risk written all over you. After a couple of 'bad days' you might ask yourself why am I even leaving the house and burning $4 per gallon gas for nothing? If you can't overcome this feeling, at this point it becomes self-fulfilling, and you should probably think about a job outside of sales or in a supervised office environment.


Conclusion
For a sales person, this is the highest risk/reward compensation model. For the company, it is the lowest risk. Sure they may pay a little more in the long run, but they never risk real money. The other issue is that this often does lead companies to chew through new sales people and alienate customers. If you feel comfortable doing this and can take a draw and have enough money saved away that six months of being poor doesn't scare you... well go for it!

I miss the Web 2.0 boom

Do you remember three years ago? It was a glorious time. Everyday brought a new webapp for... well you name it but odds were it was some sort of a calendaring, to-do list and GTD centric monstrosity. I LOVED IT!

It was similar to taking a test drive in a new car everyday and by observing their processes and looking at the logic behind them you could actually quickly pick up tidbits to improve your own personal work flow. It was fun. You saw great ideas that were implemented well and you saw great ideas whose implementation drove you near tears. You saw polished UI on systems that lacked any discernable use and you saw blatant rip offs other peoples functions and designs. The wild west of the web development. Eventually natural evolution disposed of the primordial slime and showed us the real winners.

The problem wasn't that most of the webapps that got dumped on the market were crap (but they were), barely functional (the new meaning of BETA) or that the market quickly became over-saturated, or that it was obvious that no one with business experience was involved in half the ventures. Or that no one had done any test marketing to see what price the market would carry. No, the problem was simply that these products were developed to cash in rather than solve a problem.

37Signals and Remember The Milk stand out as companies that not only survived the commodification of the productivity webapp market but thrived in it.

The 37Signals Story is well explained in their book Rework (shameless affiliate link) which is a good read but I wouldn't go ahead and fire your MBA management staff just yet. The reason they succeeded is because their products were the results of internal needs, it had a built in test market and opening it up to the public really brought very little risk for a company whose core-competency at this point had been custom development for 3rd parties.

It was simple, it was pretty, it was affordable and they made the lack of features their selling point. "Sure, you can get Salesforce.com but not only would you pay 10 times as much per seat license but you would be drowned by a sea of options that the average small and medium business user will never use. Think of the training cost you'll save... the tech support...".

I'm convinced the real 37Signals products are as much of a success as they are is due to the way its development came about. They identified an internal process that they could optimize with software. They developed the software for it, it fulfilled its mission and did it well. At this point they decided that it was good enough to go into the market place. Contrast that with Joe Q Doe looking at the plethora of GTD webapps and deciding to add another one to the mix to cash in on the fad. And sadly it really was a fad as most of the sites have since vanished.