For Some, Paying Sales Commissions No Longer Makes Sense

“About two and half years ago we started to realize that commissions were getting in the way of our company’s ability to achieve our mission and purpose,” said Craig Gorsline, ThoughtWorks’ president and chief operating officer.

To many in the highly competitive world of sales, such a move is tantamount to blasphemy. But Mr. Gorsline and his top executives concluded that the world had changed since ThoughtWorks opened in 1993. Twenty years ago, the company’s clients needed sales representatives to explain pricing and polices. Today, the Internet has made such information widely available. “Commissions were getting in the way of a proper dialogue with our customers,” Mr. Gorsline said.

ThoughtWorks is not alone. A host of companies are rethinking commissions and the role of sales representatives. “The carrot-and-stick model has diminished the rate of return on performance,” said Tom Searcy, chief executive of Hunt Big Sales, a consulting firm based in Indianapolis. Thanks to the Internet, Mr. Searcy said, even before a sales agent shows up, “the customer has done the work comparing vendor solutions, checking scores of comparisons from users and buyers.” That, Mr. Searcy said, is why, in large part, he believes the commission-free sales force is the wave of the future.

The proponents of ditching commissions believe they foster negative behaviors, such as focusing on an individual’s profit over the company’s, emphasizing short-term outcomes and encouraging unproductive competition among sales representatives. Even companies that pay commissions can face costly turnover as representatives chase more lucrative offers. But to do away with commissions altogether raises a concern that these companies share: Without them, can they attract and keep top sales agents?

Over the years, ThoughtWorks prided itself on developing a culture based on collaboration. But some parties in the sales equation appeared to be operating at cross purposes. “We made the decision to take the individual incentive out of the picture,” Mr. Gorsline said, “and instead focus on the customers and their pain.”

Throughout 2011, the company worked on a strategy. During that time, Mr. Gorsline and his team brought the entire sales force together to discuss the new direction, explain the rationale and provide a forum for discussion. “It was all very transparent,” he said. Next, they met with individual sales representatives to establish a new compensation plan. A start date of January 2012 was set.

According to Mr. Gorsline, the straight-salary structure took into consideration high performers, offering them compensation close to what they had earned with commissions. Still, all of the representatives took pay cuts — although they did gain something: a steady paycheck. “We operate in a cyclical industry,” he said. “This provided them with a sense of security whether it was a good year or a bad one.”

Still, about 10 percent of the representatives quit. “They clearly didn’t like the approach,” Mr. Gorsline said. “But in the grand scheme, that was O.K. for us. We were then able to use this as a filter during recruiting. We ended up with better candidates, aligned with our overall mission.”

More important, Mr. Gorsline said, the company’s annual growth increased between 18 and 22 percent in each of the last two years. “We still demand revenue generation,” he said. “The only thing that changed is the way they are compensated.”

This is not an entirely new phenomenon. In 1991, Terry Ortynsky, the founder and owner of the Royal Auto Group, a car dealer in Saskatchewan, Canada, with annual revenue of 75 million Canadian dollars, stopped paying commissions and ended all incentive targets for his sales team — something almost unheard-of in car sales.

Confronted with chronic high turnover in sales, Mr. Ortynsky concluded that “there was a conflict between doing what was right for the customer and an individual who wanted to earn a higher salary.” Because the real goal is to build relationships with customers, Mr. Ortynsky said, “it’s a team effort, and you can’t really divvy up commissions in that situation.”

Article source: http://www.nytimes.com/2013/11/21/business/smallbusiness/for-some-paying-sales-commissions-no-longer-makes-sense.html?partner=rss&emc=rss