Why do we pay sales commissions?

I was very pro-comissions until I worked commissioned sales. Completely agree with the author.<p>I had extremely high numbers, but I hated the work environment. Suddenly every other salesperson wants a piece of you. Trying to stick their names in for a percentage of the sale. Screwing my long term clients for a very small short term sale. Even breaking into my desk to copy my book of business. Adding commissions = scorched earth among co-workers. Not even talking about how this affects training/new hires.<p>Without incentive my performance would have been equal or better. Commission sales specifically attracts sociopaths.<p>edit: Despite the above; I think hackers should try a real sales job at some point. It's empowering once you learn how easy it is.

I have trouble with a comparison between incentive comp schemes for programmers and sales commissions. One of the biggest problems with programmer incentive comp is the need to align it with business goals --- which is why you'd have to be an idiot to pay per-line-of-code. Programmer comp is several layers of indirection away from company income.<p>The same is not true of sales comp. Salespeople earn commissions on money they are bringing into the company. It's much easier to measure and while it's not easy to perfectly align incentives (which is why sales teams have spiffs and regions), it's at least possible.<p>Remember also that the alternative to "no sales commissions" probably isn't "lower paid account managers"; it's "account managers paid nearly as high, but on a salary basis". The best sales account managers can virtually print money; the median sales account manager can't sell bottled water in the Sahara Desert. Most companies that do direct sales need to attract talented sales teams.<p>But even with a perfect sales team, most products have sales cycles stretching weeks-to-many-months. Which means it can take a quarter or two to see how a sales account manager is going to work out. If you're paying them fixed comp, that's an awfully expensive experiment to run.<p>I have no idea how well this works with "inside" sales teams ("dialing for dollars" operations); maybe fixed comp makes more sense there.

I will tell you, for anyone who actually helps to build the selling product, there is nothing worse than watching a salesperson completely oversell a project, walk away with a fat check, and you are left holding the bag and working overtime.

The article mis-interprets Ariely's study.<p>Fog Creek asserts that the study shows a negative relationship between commission and performance. This relationship was found - for very large rewards. Small rewards increase performance when compared to no reward.<p>Here is the original paper: <a href="http://m.pss.sagepub.com/content/15/11/787.short" rel="nofollow">http://m.pss.sagepub.com/content/15/11/787.short</a>.<p>In a follow-up study, he showed that effort increases with reward almost as predicted, but error rate increases exponentially: <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-937X.2009.00534.x/full" rel="nofollow">http://onlinelibrary.wiley.com/doi/10.1111/j.1467-937X.2009....</a>. The effect is also variable depending on whether it is a primarily intellectual or mechanical task.<p>I'm not making a ruling on commissions here, just saying the Ariely quote corroborates Fog Creek's null hypothesis.

<i>...and are less worried about who is going to buy right now...</i><p>So you implemented a system that makes people <i>less</i> worried about the most important thing to worry about?<p>OP makes many fine arguments about the pros and cons of commissions, but this one little nit trumps them all.<p>There are many reasons for businesses to suffer and eventually die: capitalization, profitability, positioning, etc. but insufficient revenue is the biggest poison of them all.<p>I always thought of revenue as the water level in a creek. Enough covers all the ugly rocks below. Insufficient exposes all other weaknesses.<p>It sounds like Fogcreek must be doing rather well for this to work and I'm happy for them. But it makes me wonder: if revenue ever starts failing to meet projections, how soon will commissions be re-instituted to stop the bleeding?<p>[EDIT: Some of the replies below imply that I overlooked the words "right now", but that was exactly my point: like oxygen, "who is going to buy <i>right now</i>" is the most important thing to worry about. Enlightened organizations may be able to ascend Maslov's Hierarchy of Needs, but as soon as sales people worry less about Level 1: Revenue Right Now, I begin to worry.]

Measurement &#38; Leverage?<p>My experience in sales is tilted almost exclusively to real estate transactions, but I'll say PG's How To Make Wealth Essay offers an explanation (<a href="http://www.paulgraham.com/wealth.html" rel="nofollow">http://www.paulgraham.com/wealth.html</a>).<p>There is large variance in skill when it comes to many jobs, but in sales it is huge. Fortunately we can measure and properly attribute the more skillful salespeople, and those people have a pretty clear impact on the firm's revenues. All the negatives mentioned in the post are certainly true, although in real estate the mitigating factor is that the biggest source of leads for good brokers are referrals from past happy clients (enterprise SAAS is probably less viral).<p>Sadly there is also large variance in programming skill, but it's far harder to quantify or justify or transport to the next employer. In real estate, if you suck and sold no houses in 2 years as a broker, or if you were awesome and sold 30 houses, that's easy for a future employer to notice and verify. When I interview for hacking gigs, no one really knows whether I did a good job, I can only say what I generally worked on and have them take my word for it as a 1/N contributor. Self-employed programmers seem to be able to sidestep some of these problems.

IMHO, a key reason this works well for them is that their compensation package is really nice and well rounded: <a href="http://www.joelonsoftware.com/articles/fog0000000038.html" rel="nofollow">http://www.joelonsoftware.com/articles/fog0000000038.html</a><p>In short: they pay market rates based on a transparent internal system of scale, they have a generous profit sharing plan (thus motivating everyone to increase profits regardless of role) and excellent benefits (health and non-health related).<p>It's hard to argue against a system like that.

I remember some years ago talking to the CEO of a company that was doing a great job of selling to us - I mean way over expectations - fantastic.<p>I asked - how much are you paying that guy - he is great? the answer was - "an OK salary" - but they did find out what motivated him - for this guy it was vacation time.<p>Everyone wants a salary that reflects their worth in a business - then (for peak performance) everyone might have different motivators. It might be recognition, a great car, a better office - it does not matter - find out what it is and supply it...

It's a very thoughtful post, they've put the usual Fog Creek thought into this. But I suggest that one year is not enough time to properly evaluate the policy.<p>For one thing, I wouldn't say this is known good until the organization has demonstrated to itself that it can recruit / train / inculcate new people into this system. I'd suggest they'll also want to keep an eye on how the sales team evolves over time -- habits die hard, but they do die, and it may be that the commission system served to ensure that some positive habits were maintained.<p>For another, this may be suited to their competitive niche, or even this particular moment in their market penetration. If the product is selling itself, if the market is growing for everyone, then commissions may not help and may be counterproductive to the image and relationships they want to build. The situation may change if the market position matures and stabilizes.<p>I'm not saying any of these _will_ be issues. I'm just saying that corporate cultures develop over periods of years, and that comp systems are important signals into that development. It sounds like this is going great, and good management will always be looking at how corporate culture is moving -- but I would think management would want to keep a careful eye out for unintended consequences of this for quite some time.<p>(And they may well be doing just that. But the post seems a little more definitive.)

I suspect FogCreek had success because their sales team is relatively small, but I'm curious to see how this works long-term. Is a lack of commission structure going to deter future recruits? They said nobody left, but have they tried hiring any additional sales reps? Big time sales reps will assuredly balk at the prospect of cutting their income to some average amount, but perhaps that type of employee only exists at larger organizations.<p>As a sales engineer, I'm not sure I agree that employee views can be divided into a black-and-white categorization of X vs Y. I'm not lazy, want to avoid work, etc., and yet I still think a $200,000 deal requires more work and yields more profit for the company than a $5,000 deal, and thus I should be rewarded for that additional effort.<p>Comparing this reward system to coding or some other profit-generating segment of the company only works part of the time. With sales, the increased profits available for reward are immediately clear. With coding, the value-add of a coder's efforts are less clear, so it's up to his or her manager to see the financial impact of that employee and reward accordingly via bonus. Simple example: a friend of mine optimized some javascript, reduced the file size, and this ultimately saved his company over $200,000 a year in bandwidth. This is quite clear, whereas a simple bug fix or new feature is not.

I'm surprised Fog Creek kept commissions around for so long, considering that Joel has been writing articles about how incentive pay causes dysfunction since 2002 (Edit: 2000, even!)<p><a href="http://www.joelonsoftware.com/articles/fog0000000070.html" rel="nofollow">http://www.joelonsoftware.com/articles/fog0000000070.html</a><p><a href="http://www.joelonsoftware.com/news/20020715.html" rel="nofollow">http://www.joelonsoftware.com/news/20020715.html</a><p><a href="http://www.joelonsoftware.com/items/2006/11/10b.html" rel="nofollow">http://www.joelonsoftware.com/items/2006/11/10b.html</a>

Why salespeople are on commission? Because it's one of the rare jobs where performance can be easily and objectively measured.<p>Most of the arguments in the article could just as easily apply to a fixed salary (jumping ship for better pay, fighting over who gets the big deals etc). And I would argue that the theory y vs theory x argument, that good employees are by nature more intrinsically motivated than just in it for the money, probably holds true a lot more for programmers than for salespeople. By definition, sales is about getting customers to pay money, so for a salesperson it's probably a good thing to be motivated by money.<p>The real question about commission-based compensation is: Is what I measure, and pay people for (this quarter's revenues) really what I want to achieve (maximum long-term profitablity)?<p>If you pay by commission, you will probably get higher revenues right now, but also more of the problems mentioned (mostly overselling to customers that arent really a good fit for the product).<p>I'd say it depends on the situation the company is in. If you're an established, profitable software company like FogCreek that wants to build long-term relationships with happy customers, a fixed salary is probably better. But if you're a startup with 2 months of runway left, desperately needing some revenue right now, you're probably better off paying commissions to your salespeople.

Long time HN contributor, first time I've felt the need to go anonymous.<p>I've been in sales my entire professional career, but always commissioned based. I've worked in SMB with small teams and enterprise with massive teams. I feel like these are related points (to paying commission), but you may have a different opinion.<p>First, commission is like crack. Once you get a taste, it's hard to kick. Earning potential is outrageous. I was the highest paid employee for two years. I made more than the founders, anyone on our leadership/executive team, and anyone that built what I sold. That last point kept me up at night, so I eventually found a way to redistribute the wealth. I stayed in sales because I couldn't imagine "how anyone could live on that little" (&#60; $100k). It's hard to quit.<p>Second, crack either transforms people or attracts a certain personality type. I've never been surrounded by so many disloyal, self centered, unethical, and maniacal people. Ever. I've also caught myself crossing boundaries I would have never previously considered -- until I thought about how it would push me over the accelerator and significantly increase my commission. I have met some people with strong character and ethics in sales, who are great salespeople, but they're a tiny minority.<p>Third, those ethical breaches typically result in misrepresentation of the company/product/service you're selling. Commissions are typically paid on a contract, not on the lifetime value of the customer. I firmly believe the commission-based sales people are potentially the most damaging thing to your company. Set an inaccurate expectation to close the deal? As a sales person, you're on to the next one. Results in high churn and damaged credibility, neither of which affects the salesperson's commission check.<p>Last, sales people are typically the least knowledgeable in the organization about the company/product/service they're trying to sell. I've always been in, uhm, technology as a service(?), but neither of the companies I've worked at have any desire to hire people who understand the technology. They hire salespeople that have "consistently exceeded quota" and "increased customer spend by x" or some other sales achievement. That's great, dude, but you sold fucking vacuum cleaners. What do you know about the product those guys in the dark rooms are slaving away over? Why are you the best person to go out and represent all of us in the market? Speaking of, I've yet to interview a salesperson that's come in with "here's a list of my previous clients who will vouch for my integrity."<p>For those talking about large sales team, I can personally assure you all of the negative aspects mentioned in the post become even more apparent with scale. Poaching leads, generating fake orders, tarnishing the company to exceed quota ("total lack of ethics")-- it's all there, and it's easier to hide in a bigger pond.<p>I know you need to move units and generate revenue, but I agree, why do we pay sales commission?

I'm sorry to say that this is wrong on so many levels. We engineers like to believe that the author is right and our guy gut tells us that "hey why do the sales people get commission and I don't??".<p>So why is the author wrong?<p>While there certainly ARE cases where commission is being used in the wrong way, there is nothing inherently wrong with it.<p>1) The author misinterprets the research and states that people perform worse when under an incentive. This is only true for INTELLECTUAL tasks. If you tell one group of people that they get $50 if they solve a math problem in five minutes then that group will perform worse than another group without an incentive.<p>But if you tell one group of people they'll get $20 for every brick they move from A to B in five minutes you can be sure they'll move the bricks much faster than a group with no incentive.<p>2) "The problems include infighting over who gets credit for accounts and sales." Again, a problem with how you set up the system. This fighting can easily be avoided. Just make sure it is clear who is responsible for each customer.<p>3) The author also forgets one of the great features of a commission based system. If you are a small startup you may not be able to hire a large sales force. In that case, you can hire great sales people at a low base salary and make sure they only get paid when you get paid.<p>TL;DR: commissions are a tool among others. Use it well and it will help you. Use it in the wrong way and it won't. Use common sense.

I find it a bit baffling to see so many comments defending commissioned salespeople with claims that most of the major problems with commission are due to improper management or pay structure or this or that. Where are all of these magical salespeople in enterprise software sales who are knowledgeable, ethical and do not overpromise? One might even argue that this type of sales process leads to worse software as it becomes bloated with promised features, half of which are never used.

Previous posts[1] have indicated that Fog Creek does rather extensive profit sharing. Isn't that just a form of commission? Further, profit sharing includes non-sales employees.<p>[1] <a href="http://www.joelonsoftware.com/articles/fog0000000038.html" rel="nofollow">http://www.joelonsoftware.com/articles/fog0000000038.html</a>

Honestly, I think places use commissions for the reason of underpaying some salespeople- not for the reason of rewarding top salespeople.<p>In my experience, commissions exist so that places can hire a ton of salespeople with relatively little risk to themselves.

Atlassian (which also makes bug tracking software) has been around longer than Fog Creek, and doesn't even have salespeople, much less commissions.<p>Demonstrated model of success, no need to blog about it in 2012.

I agree that commissions can generally be corrosive (and are a hallmark of lazy management, generally speaking), but I have to wonder how this would work in larger teams.<p>In smaller teams (when managed well, and with the right talent), the focus is always on the sales number vs. the sales commission, which is properly considered as a byproduct of the sales number. If you dig deeper, many of the negative attitudes are associated to reps working to hit their sales number.<p>My assumption is that sales numbers still need to stand at individual levels (to avoid social loafing) unless the team as already proven themselves. I'd be interested to see what different problems this tactic floats later down the road.

The fundamental reason companies use commissions is because it shifts risk from the company to the employee. Companies that depend on salespeople tend to scale up with the number of feet you have on the ground. If you pay salaries, every employee increases your cost structure. If you depend on commissions, employees pay themselves or go hungry.<p>You can see this in an extreme form with car dealerships, where the salesmen are usually 100% commission. It's common for dealerships to have a half-dozen salesmen loitering on an empty lot, because they don't cost the dealership anything.

Very few salespeople can actually sell. By which I mean find prospects, build a pipeline and actually close deals on their own. Many are just order-takers who are in the right place with a warm prospect. I would put the percentage of "real" salespeople at around 20%.<p>Many people hired for a sales job never actually sell enough to justify their cost to the company. Hence the need for commissions as a way to weed out the many non-performers.<p>If all or a majority of compensation is commission, you also deter the non-performers from trying to get the job in the first place.

I thought this article made a lot of really good points (especially about wasting time tracking commissions).<p>However, the OP seemed to miss why we pay sales people with commissions but programmers with salaries: it is easy to objectively measure the output of sales people and it is not easy to objectively measure the value of code.<p>If you asked the question, "Why do we pay most people in salaries?" the answer is because there is no easy way to pay-by-performance for most creative, subjective, or service oriented tasks.

Sales guy and coding hobbyist here.<p>My snarky answer to this is if a software guy wants to get rid of commissions, he shouldn't complain when I client gives him a mock up in Word.<p>My serious answer is the problems his sales department had were symptoms of a broken system. Many easy, smaller fixes could have alleviated the boiler-room atmosphere he describes.

But surely all the logic applied here to commissions also applies to quotas, right? (measuring performance, assigning credit to a sale to a particular sales rep, dividing up territories equitably, etc) But the post doesn't mention eliminating quotas. Wouldn't they go hand in hand? Can you have a sales force without quotas?

Our company does not have commissioned reps either, and frankly, I'm not complaining. Our sales figures are fine.

This is just an absurd argument. You're paying top sales people commissions because thats what top sales people demand! You dont have a choice in this matter if you want real world class sales people -- you'll be giving them more than just commissions!

It seems through all of this everybody is forgetting about the customer!? I'm interested in knowing if a commission based scheme for the sales team has ever worked out well for the end user/buyer?

The most effective sales quota scheme in my corporate experience: 10% higher sales than your last quarter.<p>There are many more complicated systems, but this one was very difficult to game.

Fogcreek doesn't seem like the best proxy for a "normal" company. Would this work on a broader basis?

Why didn't they call this blog post "Why we don't pay sales commissions"?

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"Our salespeople all estimated that they were spending about 20% of their time just keeping track of what money was due them. There was constant horse trading."<p>I had to laugh at this. How is this that difficult? An excel spreadsheet with a few columns might only take a 20-30 minutes per day (if that). If it's based on a percentage, excel can automatically calculate that based on a column. I am a re-seller for a few products online and this is exactly how I calculate it. I have another sheet that tallies all of my monthly revenue. I can't imagine it being much different when selling services or products for a company like Fog Creek. You could also keep track of all names/companies, etc. here.<p>I'm going to offer another perspective: Fog creek basically just gave themselves a pay raise. Rather than giving salespeople a cut of the sales, they now are paying them a flat-fee.<p>Some people may like this because now they have consistent income. However, it's much less than what they could potentially earn. If I was a salesperson there, I would quit. I would like to see the results of this in 1 year (or 5 years). I suspect they will switch back to a commission-based system within that time-frame.<p>It reminds me of my brother's job. He used to work as a bike builder at a local shop here in PA. He used to get paid $10/bike and he would build many bikes per night. They switched it over one day to $11/hour and he then had no incentive to build as many bikes (and he admits didn't doesn't work as hard..because he was going to get paid the same regardless). Most people are like this.<p>In a way, it's like converting from free-market capitalism (you have no limit to your success) to communism (everyone is now equal).<p>They do this to developers all the time. Every job I've ever had has been based on salary. This sounds great, until you realize that the employer now has no incentive to keep you within 40 hours/week.<p>At one company, the new COO came in and announced that new working hours were an hour earlier and half-an-hour later. Everyone working there was on salary, so we essentially all got a pay-cut.

"""Think for a second: we don’t insist that other kinds of workers be paid on commissions. Only an amazing idiot pays a programmer by lines of code."""<p>This is an idiotic argument, if I ever saw one.<p>Lines of code don't measure the programmers contribution to your companies bottom line.<p>Sales do.<p>That said, paying sales commissions to sales people is not that different than giving shares and stocks options to programmers as an incentive.<p>A mediocre post, at most.