Eliminating Sales Commissions

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Eliminating Sales Commissions

Sales commissions are almost universally used in the software business, as in all business sectors. They are liked because they align incentives between sales staff and the companies that employ them. Nevertheless there are serious problems with the sales commission model, problems that led Thoughtworks to get rid of all sales commissions in 2013.

We concluded that our experiment with removing sales commissions led to an unacceptable reduction in the effectiveness of our sales capability, so we restored sales commissions in 2018.

Martin Fowler

2013-02-18

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(Quotations from ThoughtWorkers are extracted verbatim from internal emails.)

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Commissions are the established way for sales

A simple example of a commission scheme…

Management sets quota for sales, say 1000 widgets in 2013

If the salesperson sells less than quota, they get the base salary

Salespeople who get more than their quota gain a substantial commission, in addition to their base salary.

There are many kinds of commission scheme, but the common feature is tying a salesperson's income to the sales they made. If they don't make their quota, they don't get their OTE (On Target Earnings).

• Commissions are popular since they align incentives. This way the salesperson earns money depends on their sales - which is what the employer wants.

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but there are problems

• Usually salespeople get commissions based on closing the sale, but there is a risk they will sell services that are difficult to fulfill, leaving the delivery team to pick up a mess. This tension is made worse because delivery teams are a big factor in selling follow-on work, yet aren't included in the commission.

Although this is most commonly a problem for services, it also happens with products, when post-sales people feel they are forced to try to fit a square product into a round need.

[removing commissions] takes away the scenario where the decision-making process for a salesperson is (or is perceived to be) influenced by personal commercial incentives.

• From a leader's perspective, it's better to move an experienced salesperson from easier work to harder tasks, or to get them to spend time mentoring less experienced staff. But doing these things makes it harder to make quota, so the salesperson's incentives aren't aligned with the needs of the office as a whole.
• Monitoring sales figures is a significant drain on both the sales staff and management. Disputes over lead allocation, quota setting, and allocating sales can use up a lot of time and erodes trust. Certainly similar problems with occur with setting salaries, but arguments over commissions tend to be worse.

the amount of time spent by management defining and monitoring plans and more importantly by sales people optimizing plans and tracking them for their own cashflow purposes etc is unbelievable

• Commissions set up a competitive environment where salespeople are encouraged to look after their own commissions first, reducing cooperation between them.
• Commissions can act as deterrent from selling innovative solutions. Such things, whether new products or unconventional approaches to service delivery, are often more difficult to sell. Therefore a salesperson can be put in a position where their income is at risk when when deciding whether to recommend an innovative approach.

We need our salesforce to be as enthusiastic around taking new innovations to market as it is about the proven money-making products like Go, Mingle and training courses Even if these problems don't occur, the perception that they may happen erodes trust

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I've seen sales style fit between two poles

• Some see their role maximizing the sale of their employer's product. This often leads to the jaundiced view of salespeople who will sell product without caring whether it is good for the customer. A more generous way to see this is that the salesperson is a product advocate. Their job is to present the products in their best light, it is up to the customer to determine whether the product is a good fit for their needs

• Some see their role as forming a partnership between buyer and seller. Their job is to understand the needs of the customer and the capabilities of the seller's products - helping the customer choose products that are the right fit for them even if the customer isn't able to determine this themselves. The result is a relationship which is better for the seller in the long term.

Sales commissions fit better with the advocate style

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At Thoughtworks, we've considered removing commissions

• We've long felt that sales commissions are in conflict with our intention to be partners with our customers.
• Many of us consider the notion that commissions align salespeople's incentives with company performance to be a myth. Getting a salesperson to optimize their individual performance subobtimizes the sales arm as a whole, let alone all of Thoughtworks.
• Some Thoughtworks sales people have individually abandoned commissions, seeing the incentives as unhelpful for partnership sales.

We had been thinking about doing this for ages - it just didn't seem right in our culture despite the industry driving everyone towards this especially on the sales side. We were told that we would not be able to find the best candidates (some said we would not find any candidates), we were told that everyone in sales would resign, we were told it was the biggest risk to revenue we had ever taken. but our concern wasif we get rid of sales commissions......will we be able to attract and hire good salespeople?

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We decided to go ahead2009

• Explicitly targeting partnership salespeople in our recruiting in order to get a better cultural fit.

2012

• All salespeople moved to either no-commission or a reduced commission proportion. A post from Fog Creek was a helpful push.

2013

• All commissions ended - all sales now on a regular salary

• This no-commission policy applies to both to professional services and to Studios (our product division).

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We are happy with the effects so far

• We have lost some salespeople, but (as we expected) they were more the advocate-style salespeople who were not such a good cultural fit for us.
• Stating we don't pay commissions means that salespeople who would be a poor cultural fit are deterred from talking to us (saving us recruitment effort). Better still we've found that not having commissions has already been a big factor in helping us to recruit partnership-oriented salespeople.

• It's taken a bit longer to increase the collaboration between sales staff. The competitive environment that a commission routine sets up takes a while to change, but while that change is more gradual, we can see it happening.

• One thing we neglected to consider as we made the change was in how the commission structure feeds into the self-evaluation of sales. Everyone likes feedback on how they are doing, and removing commissions takes away a habitual feedback mechanism, albeit a critically flawed one. There's no simple answer to this, while we can come up with indicators essentially it boils down to recognizing the fact that sales, like so many professions, is a multi-faceted activity that resists simplistic external measures.

It has allowed us to take the issue of money off the table when having discussions / negotiations regarding staffing and projects, and this has been immensely positive. There is a significantly higher level of trust when it comes to discussions on new opportunities as there is no question surrounding intentions / motivation being driven by personal financial gain.