Practice Management

Compensation Systems: Sales Commissions

What?s the latest view on paying sales commissions in professional organizations?

I?m generally not a fan, because paying a commission:

1. Fails to distinguish between revenue and profit. It can reward bringing in work that the organization loses money on (or at least makes less money than other alternative uses of its scarce resources.)
2. Fails to distinguish between on-strategy and off-strategy work. The organization ends up with an ?if it moves, shoot it? mentality.
3. Over-rewards the person who makes the final sale (the transaction), and under-rewards activities (for example, seminars, articles, speeches) that ?court? the audience and lead them into conversations that result in sales. Consequently, it encourages an impatience that may backfire in building business.
4. Encourages salespeople to think of their own rewards (the commission) rather than truly helping the client, and hence creates an uncaring market image that may backfire.
5. By overstressing individual commissions, can prevent the cooperative teamwork necessary to execute a full coordinated marketing program. Instead, the sales efforts are no more than the (weakened) sum of a lot of individual efforts, none of which has the impact to make a big difference.

In spite of these concerns, sales commissions are still common in a lot of professional businesses. In some, such as real estate brokerage or headhunting, it?s at the core of how individuals are paid (X% of all revenue generated to the individual, the remainder to the firm.)

And, as firms (in, say, law and accounting) try to get their junior professionals involved in generating business, I see them experimenting with paying those juniors a percentage of what they generate.

What do you think about all this? Are sales commission systems good in a professional business context? If not, why are they  common?

Full post as published by Passion, People and Principles on January 28, 2008 (boomark / email).