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Zappos metrics (C) Maury Weinstein"Sales people are competitive! They love competing." Or so the logic goes. But with the raise of gamification and a better understanding of the behavioral and motivational science, this popular stereotype should make way for better incentive systems.

The global financial crisis of 2008 – under which we still suffer – spectacularly demonstrated the flaws in ill-designed and misunderstood reward systems. A melange of multi-layer detachment of metrics from real money, short-term thinking, unlimited reward potential, bad management and oversight, players willing to beat the system, and other factors profited few, but hurt many. What seems so obvious in hindsight for most of us, is also a tell-tale sign of our ability to ignore the facts when we think it can help our short-term goals.

Sales people across the globe are basically managed by the same type of incentive system: close a deal, get a commission. The more deals, the more money they get. But we know that this is not always leading to the best outcomes. We shiver thinking of the "car sales guy" who's pushing more care features on my list and me to buy today and not tomorrow. Or we have met the sales person in a tourist resort who's switching from "I am your friend"- to "please buy or my kids go to bed hungry"-mode.  

It turns out that this is not the exception, but the standard. Customers show buyer's remorse more often than you may think. And the reaction is that customer avoid these stores or that person in the future and the long-term relationship is destroyed. From where does this behavior originate and what can be changed? And if it's changed, would the world be a better place?

When a company goes commission-less

I had the pleasure to speak to Maury Weinstein, who's the president and co-owner of the IT company System Source in Maryland. He switched his company in 1994 to a non-commission based system for sales people and spoke about the reasons for this bold move. Starting with the following things that posed problems with a commission-based system, Maury framed the problem-areas.

Quota-hunt

At the end of a period, when sales agents have not yet reached reached their sales goals, they tend to become very very pushy towards the customer. The resulting conflict of interest may not have the best outcome for the customer in mind, and sales agents pushing customers to buy products and services that they may not really not. Such a behavior also makes the customers want to avoid the sales agents. They are not picking up the phones. Even if they close deal, the sales agents may have burned the customer for recurring deals. And sales agents, who tend to be more extrovert types, want to be liked. Being forced to such a behavior leads to the opposite effect, and that is demotivating in the long term for the sales agent.
The nature of commissions leads to a detachment from the customer, where customers are often just seen as "piece of meat," as one manager called it.

Internal conflicts

Commissioned employees never work in a vacuum. They rely on the people who make the product and provide the service, otherwise there wouldn't be anything to sell. Documentation, support, demos, and other collaterals that help sell a product are often provided by the non-commissioned colleagues. Leadsalso are not generated purely by the sales team, they often come from soft leads that other employees bring in. This leads to rivalry, envy, and often open conflict between commissioned and non-commissioned employees. The work climate may become poisoned, or in the worst case lead to sabotage and refusal of collaboration.

Commission Administration

The commission system itself requires quite some attention. Even if there are seemingly clear rules and criteria of when and how much commissions are paid or can be earned, commission-based employees will find reasons why the system needs to be more flexible, why they should get a commissions paid due the unfavorable circumstances in that particular case, or who should be credited for that deal. Or sales reps find a way to game the system, which later on has to be fixed. And there will always be loopholes. Management can easily spend 20-30% of their time of dealing with the commission system. But not only management wasted considerable time on that, also the sales people. Dan Ostlund from Fog Creek Software quotes sales people in his musings Why do we pay sales commissions? and how they estimated to spend approx. 20% of their work time on keeping track on their compensation.
What employees hear from management, is that they speak with a "forked tongue." Management emphasizes in their appeals the intrinsic motivations, but the employees only hear "commissions."

Fluctuations

Every now and then, the economic cycles won't guarantee satisfying levels of commissions that can be earned. That adds stress to commission-based employees, when commissions form a significant part of their salary. These employees tend to burn out faster.

Competition

Because of the competitive setup and the pressure to fulfill quotas, sales agents tend to show behaviors that are anti-collaborative towards colleagues and the company (more about competition can be found in my article On Competition and Gamification Gurus). Adding information about clients in a CRM system is a distraction from the pursuit of closing deals and reveals too much information about "their contacts." Somebody else could take advantage or endanger the delicate relationship with the client.
Sharing best practices and doing post-mortems on what helped to close specific deals or contributed to loosing deals are not in the interest of the successful employees. Helping each other and sharing knowledge through richer information in the CRM system and the knowledge-base does not help the individual sales rep under such a setup. 

The Switch

When Maury finally realized that the commissions system creates all those negative effects, he decided to get rid of it. Commissions would be replaced by a group profit sharing program based on the overall company's performance, and the base salary increased to counter the loss from commissions. The uncertain point was how the sales reps would react. But the result was a surprise for everyone. When he sat down with each of his commission-base compensated employees, in 45 minutes one-on-one briefings, and explained the change, there was general relieve. The sales representatives never had liked the ups and downs in their salaries, the uncertainty that had put pressure on them. The employees had regarded this as unfair shifting of the burden caused by economic fluctuations on the back of the sales reps. And they had recognized all the issues long ago, and finally also started sharing really crazy stories from encounters with customers and resulting behaviors that management had not been aware of – and would certainly not have approved. The shift away from a commission-based system had nearly without effort created a bond of trust between the employees and management. Now these were encouraging signs of a promising start. Except one older sales rep  – who subsequently left the company – everyone moved to the new program.

Results

But the true litmus test came a year after the new compensation system was put in place. The sales numbers had increased by 44%, and profitability grew three fold. While these were the hard numbers, all of the negative effects mentioned above disappeared. Moving people between programs became easy and something that employees craved. Customers felt the change, without having been told. Maury heard from them that about his sales people things like "I can trust his opinion", or "I can tell he is not commissioned because at the end of the month he is not calling." Customers who'd avoided the phone calls from the sales people now were willing to talk and sit down. The pushy sales guys turned to advisors whose suggestions could be trusted. And the sales people just liked being liked.

Non-commissioned people now felt part of the team. Before the change they would let the ego rise with the wild swings, and those you could feel in the behaviors and attitudes. Nowadays, everyone feels that they win. They win together as a team. Even when Maury's company acquired two smaller, failing companies, the sales reps from these companie,s when being told about the different system, were tremendously relieved. They all had seen the bad behaviors from other workplaces they have been and they notice the company climate immediately.

Management as well profited from the switch. Instead of spending 20 to 30% of their time on managing the commission plan, they had time at hand to look at new business opportunities, talk more often to customers, and get a better feeling of the market. Which again created more services and products, shifted the business mix, and helped to make more money.

But how do they make more money? In order to have them keep up with the market, a merit-increase system was put in place with monthly assessments. Thanks to a report card every employee knows where he or she stands and they could increase each year based on their merits. That of course requires regular assessments, and if you don't do that, then a commission plan is better. With other words: a commission system is the lazy managers tool.

Removing the competition and moving away from a purely extrinsic motivational focus to intrinsic motivations allowed the company to introduce additional elements that would have been unthinkable, not to mention unfeasible before. The company created what was called a "need-exchange program," where every employee could participate. By writing a mail about a customer in need, employees can enter a weekly lottery and win $100. Every mail becomes a basis of a new sales opportunity. By spending annually just $5,200, over 700 "needs" were generated, which translate into leads. And because everyone can participate, every employee is encouraged to interact to and listen to customers. Every other lead generation measure would be more costly than this.

Such a switch needs to be done with preparation. When commissions are removed, there is a void. Commissions are good for single-minded direction, but may not be good for customers. To make the switch management needs to be prepared and have tools at their hands.
  1. You have to match in the compensation.
  2. Make sure to keep direction.
  3. Many of the sales reps may have gotten rich by beating the system; after a switch you don't want to buck the system.
  4. Money is a motivator.

How such a commission-less compensation system looks at Fog Creek is detailed by Joel Spolsky.

Maury's experience is supported by evidence from multiple scientific studies. And he is not the only one who's done the switch. We already met Dan Ostlund from Fog Creek. But also Apple's astonishing success in the past decade is not only based on their designs and products. The shopping experiences at their stores tops just every other retailer. And then there is Best Buy, which not so long ago beat Circuit City into oblivion, not least with the service their employees gave customers. Red Gate Software is another example that successfully had changed their compensation system in 1999.
The briefings with the sales people were not free of some comical elements. Most sales reps had replied that they'd be "totally fine with a change," but they'd know that the other guys were "very competitive" and certainly would not love loosing that element.

Wharton Business School researchers analyzed responses that the current MBA student generation gave in their essays about how they were paid and managed at their last job. The results were speaking for themselves. Not everyone may have had the same reaction like this one:

"I remember someone telling me before I received my first bonus that there are two proper responses to getting a bonus: 'F-you' or 'F-you, I quit,' "

But the vast majority did not like the bonus system, due to lack of fairness, transparency, and the high degree of uncertainty. The way bonuses were calculated and paid seemed like an insult and destroy the team spirit of anotherwise highly collaborative team.

The internet shoe-retailer Zappos, that's famous for the outstanding customer service, uses completely different metrics for their call center agents, as depicted in the picture on top of the article (photo credits go to Maury Weinstein,who attended one of their tours). Metrics measuring personal, emotional, connection with the customer speak for themselves. And the success proves Zappos right: their sales people are actually the support folks. And no commissions there to earn.

Conclusion

As gamification-designers we know that extrinsic motivators work only for a short and focused time, but they can take the thoughts of situations where creative thinking or learning is involved. Dan Pink (and Dan Ariely) quote from research that show how monetary rewards can wreak havoc with motivation. Rewards make sense when people are not interest in doing them, but should be avoided when they are interested in the task itself. In this situation you need to make sure to give feedback and help the players to understand how well their are doing. And creating a competitive situation where it's not necessary, has the exact opposite effect of what's intended.

It's time to rethink compensation, now that we have the scientifc evidence and the examples from the field.

More reads

  1. Dan Pink: Drive: The Surprising Truth About What Motivates Us
  2. PBS: What Drives Motivation in the Modern Workplace?
  3. Dan Ostlun: Why do we pay sales commissions?
  4. Joel Spolsky: Fog Creek Compensation
  5. Peter Cappelli, Michael Useem, Matthew Bidwell, John Paul MacDuffie: Why tomorrow's Wall Street leaders don't like
    bonuses
    , Washington Post
  6. Dan Ariely: What's the Value of a Big Bonus?, New York Times
  7. Bruno S. Frey, Margit Osterloh: Stop Tying Pay to Performance, Harvard Business Review
  8. The Problem with Financial Incentives - and What to Do About It, Wharton Business School
  9. Alfie Kohn: Why Incentive Plans Cannot Work
  10. Mario Herger: 8 Examples of Monetary Rewards Leading to Worse Outcomes
  11. Mario Herger: On Competition and Gamification Gurus