Increase sales by eliminating commissions Flip # 3/16 Daniel Pink *ABI 1309
Daniel Pink 2012 www.danpink.com
Our comment: Here at BIR, we love Dan Pink. He brings research, wisdom and humour to topics which will challenge us and our existing ways. From You Tube, we have uploaded his TED talk to our site (very entertaining) + his RSA drawing – both great to listen to on the topic of the surprising truth about what motivates us.
Our free plug: thinking outside the square or thinking differently about issues you are facing as you look to build, improve or restructure your business is what we do. Plus, we have a range of business tools which allow you to measure the impact of changes cost effectively and time efficiently. To find out how we can help you, call 1300 783 3091300 783 309.
A little bit why we love Dan Pink
This is one of 16 little vignettes Dan put together (I think they are on his website but I’m not sure if they are still there). True to Daniel’s own mantra, we are introducing these Flip topics in whatever flipped fashion we feel like. This is #3.
Our experience: we have had numerous examples over the years which provide anecdotal support for Dan’s research. One we heard from the Franchisor of a major cake chain we all know, is as good as it gets in terms of this topic.
Our Franchisor, we’ll call him Michael, visited one of his Franchisees – we’ll call him Fred. Michael noticed Fred did not stock any profiteroles. Michael thought this was strange as profiteroles were one of the best sellers in their product line. He offered to buy Fred a tray of profiteroles so Fred could experience the sales impact by stocking profiteroles. Fred was not a complete fool so he accepted Michael’s free gift. Fred not only sold all the profiteroles, he also increased his revenue for the week by $2000. Not inconsiderable you might think – and approximately 10% of weekly takings. Well, Michael went on his merry way, doing whatever Franchisor’s do with their day. Some time later, he thought he would see how Fred’s performance was tracking with the increased sales of profiteroles. Imagine Michael’s shock and surprise when he noticed that Fred had not re-ordered any more profiteroles. Not one more tray. To this day Michael still shakes his head when he recounts this story.
Ok, how can this irrational behaviour by Fred be explained I hear you ask? Well, read Dan’s Flip below – and see if you can spot any similarities. If you need further clues, go to Dan’s TED talk for further details on the Surprising Truth as to what Motivates Us.
Now back to Dan…..
Truth often begins as heresy. Five centuries ago, human beings were certain that the Earth stood at the center of the universe and that the lowly sun revolved around our glorious planet. Then Copernicus came along with a shocker: Sorry, folks, it’s the other way around. Today, every school child knows that the Earth revolves around the sun—that this once heretical notion is, in fact, correct.
Neil Davidson might be launching his own Copernican revolution in business. In 1999, he and Simon Galbraith founded Red Gate Software, a firm based in Cambridge England, that makes development tools for programmers. Like almost all companies, Red Gate has a sales force. But unlike most companies, Red Gate has committed an act of managerial heresy: it has eliminated commissions for its salespeople.
Huh? Without commissions, where’s the motivation?
In the early days of the company, Davidson created a fairly straightforward commission scheme. But, of course, salespeople figured out a way to game it—by pushing sales into the time period most advantageous for them, by underselling one month to show a bigger gain the following month, and so on. This wasn’t be- cause they were unethical; it was because they were rational humans responding logically to a particular incentive structure.
So Davidson made the system more complex—and salespeople responded by increasing the complexity of their own behavior. On and on it went, until both the management team and the sales force seemed more focused on the compensation system than on making great software and selling it to customers who needed it.
Davidson feared that commissions were doing more harm than good—that this largely unexamined business practice might be quietly undermining his 150-employee company. He wrote on his blog: “That’s what our sales salary system felt like—a gigantic, complex and medieval Spirograph centered on an assumption that wasn’t true.”
So, with some trepidation, he approached his sales team with the bizarre idea of scrapping sales commissions altogether and simply paying people a healthy flat salary and a share of profits at the end of the year. The response surprised him.
“The salespeople thought the move was, generally, a good one, but that other salespeople wouldn’t,” Davidson says. “When I explained it to Tom [not his real name] he said, ‘It sounds like a really good idea. But James would never like it; he’s solely motivated by money. Remove the commission and he’ll leave.’ James said, ‘Sounds great. But it will never work with Tom. Money is all that drives him.'”
Not only were commissioned sales not leading to better performance, it wasn’t even the arrangement salespeople themselves preferred.
In the absence of commissions, Red Gate’s total sales have increased. And while two salespeople left the company–uncomfortable with the new regime—most stayed and are thriving—including Tom and James.
Across the Atlantic Ocean, Maury Weinstein—founder of System Source, an IT services company in Baltimore, Maryland—followed a similar path. He and partner Bob Roswell eliminated commissions for their company’s sales force in 1994. Weinstein says it’s one of the reasons that System Source has flourished for so long—and why the median tenure at his company is 17 years, greater than the lifespan of most firms in this intensely competitive industry.
Both Weinstein and Davidson have found that challenging the sanctity of commissioned sales can bring several, often unexpected, benefits.
For example, in Red Gate’s case, managers were spending a huge amount of time and energy policing the compensation system and arbitrating disputes over who deserved what. Once pay arrangements became simpler, leaders could focus their effortsts on more useful activities.
Davidson says: Rather than relying on carrots [sell more and you can buy the new car] and sticks [don’t sell enough and you won’t be able to feed your kids], we are compelled to make our salespeople’s work more interesting, to set better goals and encourage teamwork.”
Indeed, improved teamwork is another advantage.
By their very nature, individual commissions discourage collaboration. Why help ‘Mary’ close the deal when she’ll get the gains from the sale? The comp plan was dividing people, says Weinstein.
But at both Red Gate and System Source, once commissions were no longer around, collaboration and commitment increased.
And then there’s the experience of the companies’ customers. When we buy, we often see the salesperson as an adversary with whom we’re locked in a zero-sum battle. That sort of relationship, says Weinstein, is ultimately bad for business.
Ending commissions, he said, sent “a strong message to the staff: We’re not just paying you for what you close in the next five minutes. We want you to be an agent for the customer rather than a salesperson.”
In the end, an elaborate system of commissions might have been the problem rather than the solution.
“Imagine you could construct a sales robot, programmed solely by the rules in any sales structure,” David- son wrote on his blog. “How would it behave? It would steal deals off other salespeople, sell customers software they didn’t need, argue with its boss over its commission and backstab its colleagues. That wasn’t the behavior we wanted, but our commission structure sent a strong signal that it was.”
Should every company eliminate commissions for its sales staff? Probably not. But should entrepreneurs, managers, and the rest of us step back every now and again and question the supposedly fixed laws of the universe?
Definitely. Just ask heretics like Copernicus, Neil Davidson and Maury Weinstein.