Eliminate Sales Commissions: Reject Theory X Management and Embrace Systems Thinking

Guest post by John Hunter, author of the Curious Cat Management Improvement Blog (since 2004).

Dr. Deming explained that paying sales commissions to staff introduced distortions into the organization that damaged overall performance. Each topic has different connections to Deming’s System of Profound Knowledge, as he laid it out in The New Economics. The problems with sales commissions heavily touch on all of the four areas of the management system.

1. systems thinking – the distortions created by sales commissions are very damaging to the organization. The focus on sales (which an understanding of psychology tells us bonuses will create), versus the customer, leads to an organization that is not customer focused. Instead of finding solutions that are best for the customer, and cautioning the customer away from bad decisions, bonuses focus salespeople on their targets, not customer service. Most every organization with sales bonuses knows about the strain put on teamwork due to individual performance bonuses. Instead of managers having the flexibility to assign resources as needed, the bonus structure often gets in the way of optimal performance. And on and on.
2. understanding variation – even if you didn’t believe issues are raised with understanding the other three areas, an understanding of variation would require bonus systems that reward statistically valid differences in performance. Unfortunately, sales bonus systems just ignore this and end up being closer to a lottery than a bonus based on statistically valid evaluation of performance.
3. understanding psychology – there are many problems with a bonus reward sales system when you look at it from an understanding of psychology perspective. You are equating the value of employees with one metric. You devalue teamwork or helping others. You discourage teamwork, as they have been told their value is based on their sales. You tell the rest of the organization that they are not important for sales, or worthy of being rewarded for good sales. You are treating employees as a theory x manager (carrot and stick) would instead of understanding what John McGreggor spelled out over 50 years ago in The Human Side of Enterprise (that your job as a manager is to help people do a good job by improving the system, to let them do so – not by using extrinsic motivation to avoid managing).
4. theory of knowledge – is often the most difficult to understand area and the one people have difficulty applying to the workplace. But as we often find, when thinking about an issue with an understanding of the four areas of profound knowledge, you see how interrelated the ideas are. Why do we think sales bonuses are needed and useful? Often we have no understanding of variation so we attribute variation to our beliefs (an issue for how we “know” what we “know” and psychology). The principle of confirmation bias (we ignore evidence that contradicts our beliefs and value data that supports our beliefs), along with a failure to understand variation, is dangerous. The theory of knowledge also helps us appreciate that long ago, well-documented management theory is still ignored. So, our failure to apply theory y management (workers want to do a good job and managers need to help them do so, not give them carrots and sticks to get them to perform) for over 50 years, is consistent with a failure to appreciate, learn, and adopt ideas.

Fog Creek software, founded by Joel Spolsky, uses management concepts Dr. Deming encouraged organizations to use. In Why do we pay sales commissions?, Dan Ostlund, looks at why Fog Creek Software got rid of sales commissions.

There are all kinds of problems with commissions, for example, high turnover as salespeople shop jobs to get a slightly more lucrative commission system. Always attempting to maximize personal benefit which results in system gaming like making fake phone calls to hit call numbers, sandbagging deals into the next quarter, sniping new leads, and so on (the list here is actually endless).
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All of this is organizational dysfunction, and it’s a recipe for resentment and distrust among your team.

Management then tries to correct for these problems.
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According to this view sales people are only motivated by a specific type of pay—the commission, and the magic is in finding, like Goldilocks, that place that’s just so perfectly just right. Because of this we regard all the pathologies commissions create as just part of the price.

But could it be possible that we’ve got cause and effect reversed here? Is it possible that the stereotype of the slimy salesperson, and the derangement of the culture they so often get blamed for, are actually the result of the way they are paid instead of the kind of people they are? Could commissions, rather than the people, be the primary cause of dysfunctional sales cultures?
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So we got rid of commissions.
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We did it because we were having a lot of the problems with commissions described above even though all of our salespeople are ethical and decent. Commissions just encourage certain kinds of behavior; dysfunction is built into the logic of the system.
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For us, it’s been a great success, and at least from that perspective it might be time we punch the Theory X, commissions-based sales culture right in the nose. Real redemption might lie in removing the source of the derangement and treating sales people like we treat programmers and other workers that we implicitly trust.

Many companies make this move. They are often nervous because, even with all the problems, most everyone else seems to do it this way; how can we change? Well, that is why Dr. Deming was constantly pushing the need to transform. Often the hardest part is not in the doing it, but in breaking with the past and being willing to try. Once you decide to look at the value and damage sales commissions or performance appraisals create, then the most difficult part is often just deciding to take the steps to change. The change itself is often not as difficult as people imagine.

Related: Free, Perfect and Now by Robert Rodin – The Trouble with Incentives: They Work by Gipsie Ranney