What if you didn’t pay sales people commissions?
For as long as I can remember, the thinking around what motivates people was simple. The more you pay someone the better they will perform. It’s considered the basis for how sales people in particular are driven. But what’s interesting is the science says we have it backwards. And this isn’t just one strange study pointing to a weird point of view — the evidence for this is overwhelming.
Daniel Pink wrote a whole book about it called Drive. To save you the trouble of reading it, I’ll explain it in its most simple form. He distills what motivates people down to 3 key drivers.
People can’t starve
But first, you need to pay people enough to take money off the table as an issue. This is critical.
There are some levels of compensation that are just required to keep people focused. If you’re flat broke and don’t have enough to keep the lights on, money is indeed a key motivator. But after a certain point, the gains taper off. Steve Jobs famously said, (as a Billionaire might) anything above $70k — $80k and the motivation just isn’t there.
So financial incentives do work… sometimes.
Mechanical vs Mental work
If the task is very mechanical, like working on an assembly line, the financial compensation model does work. But anything that requires levels of creativity, abstract thinking or problem solving, which for most people today (especially in technology) is the bulk of work, think again.
When it comes to mental work, financial incentives actually make performance worse.
Paying a sales person commissions puts sales people and the customer in diametrically opposed positions. In the worst cases, the two form an adversarial relationship. The sales people see success as winning out over the customer; the goal is to extract money from your customers hands through the use of magic tricks.
The below video, an animated abbreviation of Daniel Pink’s book, discusses an MIT study in which students were given a whole set of different challenges where they were paid 3 levels of compensation. It shows that the larger the reward, the poorer the performance.
Let that sink in for a moment.
So what are the alternatives?
Daniel Pink’s work highlights that motivation comes down to 3 things. Purpose, Autonomy and Mastery.
This means that when people feel they are working towards a mission together, think being on a basketball team and trying to win the game with your teammates, you feel a sense of focus on your goal. Not many get paid to play basketball, but many are driven to play.
Autonomy comes down to being given the room to do your job your way. This means you want some level of creative freedom and not some micro-management boss telling you how to turn the spanner.
And finally, mastery. This is where you feel as if you’re learning your trade and getting a bit better each day. Doing something that is slightly outside of your normal capabilities pushes us, and we find that rewarding and motivating in-and-of itself.
When it comes to mastery and learning, there is also a lot to be said about how exactly we optimise for this particular activity. Spoiler alert, it is not just sending staff on a training seminar and expecting them to be fired up.
Malcom Gladwell is often cited as talking about the 10,000 hours rule in his book Outliers, but even he says he is often misrepresented here. The research he cites in Outliers, which popularised the term, is from Anders Ericsson, a researcher who has spent his entire career studying what makes high performers excel. His research is covered in his book about performance studies, Peak, and is frankly the best book on how to learn anything I have ever read. The bottom line is this - not all hours are equal when it comes to practice. You have to practice correctly.
It is not the fact that 10,000 hours leads you to becoming a master at a specific trade, it is that those who exhibit something called deliberate practice to the tune of about 10,000 hours, appear to succeed greatly. Even a small amount of deliberate practice is better than hundreds of hours of ineffective practice.
So where does mastery fit into motivation? When we work on something that is slightly difficult (that happens to meet the criteria of deliberate practice), we are influenced by a cognitive bias known as the IKEA effect. It is where people place a disproportionately high value on products they partially created. And when we value something highly, we are typically motivated to see it brought to life with enthusiasm.
When you work hard on something, like building a piece of IKEA furniture, you place higher value on it than you would have if you had simply purchased it built. Learning anything is like that, be it a musical instrument or learning to surf, the more you learn how to do it, the higher value it has in your mind. Your job is no different.
As humans we are wired to thrive in growth and challenge. Jordan Peterson theorised that “The purpose of life is finding the largest burden that you can bear and bearing it.” When people are pushed to do something they couldn’t do before, and can overcome the challenges, there’s tremendous value there and having an element of that in our work is incredibly motivating. It’s no wonder when you ask most staff today what they want in their jobs, development is often high on the agenda.
The good news is some companies are trying different approaches to paying sales people. Here are some alternative things that could inspire you when considering how to compensate sales teams.
Pay ownership not dollars
By paying equity instead of sales bonuses, it re-aligns staff with the long term objectives of your customers and your organisations health, instead of their own personal interests. Returning customers mean a thriving business and thriving businesses has real value. This means sales people who would have lied, mislead, cheated and stolen their way to getting a customer order because they wanted this months sales commission are instead focusing on the overall well-being and value of the company. In this system they are more interested in working with other teams, ensuring customers are happy, and that the business is profitable.
The challenge with paying equity is it’s still not totally inline with the research, as you’re still trying to pay for performance. It pays no heed to autonomy or mastery, but does provide some level of purpose, should that purpose be the overall profitability of the company. The challenge here is that the share price of an organisation may not be, as Warren buffet calls it, efficiently represented in the market. Market prices of an organisation move for all kinds of reasons, how good your product is or how happy your customers may be, might not impact the price. So no matter how hard your team work, they may be unable to contribute to the value at all.
The other downside is paying people equity is complicated. You can’t just give equity to staff if that’s never been possible. Founders may not want to give it out and organisations might not be setup in a way that makes it simple.
One typical metric to measure an organisation is the NPS score (Net Promoter Score). Many companies use the NPS to work out how happy their customers are. The good thing about compensating people on NPS is that it gets them focused on the happiness of customers. But there are some downsides too. First, you need to survey customers, and not everyone will provide that input. So what do you do if a sales person can’t even measure an NPS score for one of their customers? And if the sales people start making a case to customers to give them a high NPS score by trying to twist their arm, you may get all kinds of manipulation through the NPS data.
There is also a lot that influences NPS and so the sales team, if say the product they sell is terrible, may do everything they can to help the customer, but the NPS will still always be impacted by what the person buys or how it’s supported. This can de-motivate sales people due to a lack of control over their own destiny.
Relate sales to co-worker relationships.
One unique strategy employed by FAVI, a brass manufacturer in Europe is to give the sales people no quota whatsoever. Instead, at FAVI, a company who dominates around 50% of their market, simply give their sales people the following remit. Keep customers happy, sell as much as you can, so that we can keep employing staff. They put the focus on employing their co-workers, whom they have close relationships with as they work in self-managed, cross functional teams. When deals come in at FAVI, they don’t say this is a $1m deal, they say this is a 10-people-employment deal. They get the teams to understand that new deals are the reason they can employ people and this purpose is profoundly motivating. FAVI have nearly no staff turnover.
What’s best for your team?
In the end, most people will read the research and still say the sales teams should be paid commissions — because of candidate market expectations. Sales people still believe commissions are the way to go because that is the way it’s always been, and they expect it. This is changing over time, but for now, until the market widely adopts this idea, I suspect commissions will be the default.
Unless you’re willing to look at the science, that is.