Salaries Over Commissions
A Systems View of Selling
Common sense tells us to reward salesman of the month (the one that sold the most). Actually, he may be doing great harm to the company.
Salary for salesmen in place of commissions. Gallery Furniture Company of Houston put their salesmen on salary, in place of commission on sales. Result: steady increase in sales. Older salesmen now help beginners. Salesmen no longer try to steal business from other salesmen. They now help each other. They all help people in the warehouse to avoid scratches and breakage. They protect the customer, to make sure that he buys furniture suitable for his home and for the furniture already in it.
Result: sales go up month by month. Moreover, profit per square foot of floor space advances even faster…
A parallel example. The business of a company is distribution of several thousand products. Its customers are manufacturers. The company has 38 districts. The incentive was sales. The manager of each district was rewarded on sales. There was no cooperation. For example, one district would not transfer inventory to help another district to close a sale. District managers would invade each other’s territory.
Management asked division managers every hour for figures on sales, with reasons for any decrease over the hour before.
Top management made a change: The managers of the districts went on salary. Result: Sales up; cooperation, all inventories on file, and switched by computer…
Under the former system, there was a bonus for extra amounts of sales. Some salesmen did well and got bonuses merely because the product they sold was in high demand. Some salesmen did poorly because the product they sold was in low demand.
On commission, the focus was on sales. On salary, the focus is on the customer. Customers now come in for business that in former days would not do business with this company.
- Dr. W.E. Deming. The New Economics, 3rd ed. (pp. 28-29)
WHEN I was onboarded as a new employee at Microsoft, I was sent to Seattle for a two week training session which was attended by hires from all over the world. One day we were introduced to how the company “works” through a game where we’d be placed into teams for a GPS Easter egg hunt of sorts. Waypoints were scattered all over the Redmond campus in various places (like Bill Gates’ first office…) that we would have to find as quickly as possible to score as highly as possible since each had a declining value. Top value would go to the first team to find the way point, and declining values for the next three teams. Fourth team and lower, no or a low nominal value. Compounding this, we were aggregated into larger groups by color (ours was orange) within which we were encouraged to cooperate — all others were “competitors”. Each team was provided a GPS and a radio that could talk to others in their color group and sent on their way. Guess what happened?
Organized chaos. There were some really enthusiastic people on my team who literally ran from one place to another, urging us to keep up. This caused other teams to do the same. We rushed through one location to the next to try and capture top-value (I think we got it once or twice…) barely pausing to take in the surroundings. At one point as I was hanging back I spotted a facilitator and asked him if this was what it’s like to work at Microsoft. He gave me a wry, knowing smile.
Later, in the debrief as awards for top teams were distributed, we learned that the exercise was designed to simulate how different regional and product divisions from around the world work within the company: Our team color not only aligned with a region, but a product team as well. Everyone was in competition with everyone else, with cooperation limited to those on the pointy end of the stick.
Very little was discussed about how this model helped customers, however.
When I returned to Canada and began working as a consultant in the services division, I saw and experienced how this dysfunctional system would work during monthly all-hands meetings where we would have various top-managers detailing to us the latest sales figures on red/green dashboards and who was getting what awards for exceeding their goals for the region.
How did this play out for consultants who were sent to fulfill the promises made through over or under selling the customer? Not well: We’d often be on the hook to make things fit impossible time-frames. We rarely interacted with sales executives and often took our direction from engagement managers who were similarly incentivized to their bosses to just sell the solutions. Joy in work? Not here.
Reflection Questions
Consider Dr. Deming’s guidance on salaries over commissions. What effects do commissions have on a system? What behaviours do they induce? Does it matter whether they are applied to management or staff? Why do we believe that the best way to motivate sales staff is through commissions? What effect does having awards for top sales have on the company’s customers? (Hint: Review the post on Managing the Unknown and Unknowable). Besides moving to salaries, what else could be done to engage sales staff? How could a system be designed for helping customers get the right products at the right time? How could sales work with the product teams and staff to help customers?
Extra Credit Reading
If the topic of a systems view into sales interests you, consider picking up Bob Moesta’s book, Demand Side Sales 101: Stop Selling and Help Your Customers Make Progress. Moesta is very Deming-aligned, and has worked with contemporaries like Dr. Genichi Taguchi (more on him later) and was quite close with business consultant and author of The Innovator’s Dilemma, Clay Christensen. Much to learn from him!