I recently read an article in the Harvard Business Review titled A Radical Prescription for Sales, exploring the possibility that compensating salespeople with the traditional commission model is based more on tradition than logic, and the model can sometimes do more harm than good to a business by hindering growth and limiting profits.
The article goes on to say that social scientists have determined that the “effectiveness of motivators varies with the task and have discovered that contingent rewards of ‘if you do this, then you get that’ works well with routine tasks like stuffing envelopes because it causes the employee to work with laser focus, but the rewards are far less effective for complex, creative conceptual endeavors, referred to as ‘heuristic’ work.” The author points our that salespeople have evolved from the traditional transactional role in the sales process into more of a consultative one, because buyers often have done extensive research on their own before initiating the sales process, requiring the salesperson to be more of a problem-solver to complete the sale. Now, the salesperson has moved in to the “heuristic” role and therefore is motivated differently than in the past.
The article concludes that “a handful of large companies are shedding the commission model for a model that is more in line with a 90%/10% formula where the base compensation is 90% , and 10% is linked to corporate goals, not individual goals.” As a result, they are seeing an increase in total sales, where the cost of sales stayed the same.
While this article is suggesting that companies challenge the status quo and revisit salesperson compensation to reward them for their “heuristic” work (and contributing to the company’s over-all goals as opposed to their own individual goals), it does not touch on the solid foundation of execution management that is necessary to ensure that scrapping the commission model will be successful. What I have learned from working with small and medium-sized enterprises is that while they are nimble and survivors, they lack some of the organization and structure necessary to really be successful. My experience is that many times a business is started because someone has an excellent idea and they turn the idea into a business. They start small, and then 20 years down the line they have achieved some level of success – typically good success; however their business and practices lack some level of operational tools to get them to the next level.
For a new compensation model – or any other sales strategy – to be successful, it must be properly executed. My advice here is to get help with execution management, get the entire company onboard, and get ready for things to take off! Luckily, this process is not rocket science and there are proven resources available to businesses of all sizes and shapes to help in this process. While this post began about compensation, it can be applied to any business strategy. I believe that execution management and a business’ success are closely linked. The key is to link the employee compensation with the overall business goals, and the connector that links the two together is successful execution management.
