The Quandary of Sales Incentives

I’ve always questioned the efficacy of sales incentives.  Why are they needed?  Why does Sales get them and generally not Engineering, Manufacturing, Quality Assurance, and the like?  Is there truly a difference in how the different mentalities are driven? This has been a minor thorn in my side for a long time, but from different perspectives. 

Two decades ago when I was a pilot line engineer for a Fortune-20 medical device company, my roommate was a sales and marketing grunt for the same company.  “Grunt” is perhaps a bit rough, as although our ages were similar his job was not exactly in the trenches. You see, his sole responsibility was to identify and coordinate the location for the annual sales meeting.  Each Sunday evening as I began to contemplate another week of trying to figure out some product assembly defect or another, he was hopping on a plane to be lavishly wined and dined by yet another resort in places like Cancun or Hawaii.  Even “lavish” is an understatement… those resorts were hungry for meetings with hundreds of freewheeling sales guys on expense accounts, and my roommate returned with stories of suites and upgrades and lobster.  Every friggin’ week.  Tough job, eh?

All the hundreds of sales guys got a trip to some resort and the best got bonuses beyond my wildest dreams at the time.  Meanwhile I slaved away on the production floor hoping for a 3% raise.  If I did well I might get 4%, if I failed miserably I’d still probably get 2%.  What was the point?

Fast-forward about twenty years and a couple of companies, to when I took a big gamble with a couple other engineering and manufacturing guys.  We thought there would be a market for a wicked quick-turn high tech assembly operation, so we started a company.  Built on a lean foundation, using supplier and secondary op partnerships we had forged over several years we were ready to go.

But we needed sales.  How hard could that be?  Have some logo pens made up, make some phone calls, troll a couple shows.  Well after a while of realizing that didn’t work, and burning through quite a bit of cash, we decided to go out and pound on some doors.  No, no, no… and then a very rare “yes.”  Brutal.  But eventually we made enough money to pay our operators.  And after realizing that’s probably all it would be, we ended up selling the company to one of those few customers.

Sales, we realized, was tough tough business.  I hadn’t heard “no” that many times since I was a young single guy, and it was even more aggravating and depressing.  It takes a certain kind of personality to deal with that much rejection.

Fast forward again a few more years to now, when I’m running another company with multiple sites and a bunch of smart sales people who sell a very technology-intensive product.  I’ve seen sales from the outside, I’ve experienced sales directly, now I’m ultimately responsible for a sales force.  How should I motivate them?  Treat them like all other employees and expect them to meet goals but reward them when the teams and company does well?  Or have direct incentives?  It’s my quandary.

As a last point of reference, and what got me to thinking about this post, was last night here at my hotel on the Big Island.  A medium-sized company was having a rather lavish dinner for their “top 5% sales people.”  The praise was being piled on, cheers for sales numbers, and the mai tai’s were flowing.  I observed for quite a while, and determined the following: For starters, their salespeople were far more attractive than those at my company, perhaps because of a stark difference in gender balance.  I’ll have to do something about that, and perhaps it’s a goal for next year’s strategic plan.  But more importantly, these people looked like they had earned it.  One after another they took the mike to describe stories of long-fought sales conquests that stretched them, and their families, to the edge.  Weeks spent on the road just to hear “no.”  Losing a job when a mixup occurs at the factory.

One side note: be careful with what you say at these types of events.  This particular company happened to be one I do business with, and I was “intrigued” with their sales and profit numbers, and especially the growth.  I’ve already sent some emails back to my staff to take action.

So am I favorable toward commission-based sales?  No, not yet.  Sales is still part of the team like everyone else, and should be rewarded when their team and the company do well.  But the last several years has given me new and different perspectives on sales. But I still think my old roommate had a pretty cushy job.

Comments

[Peden]

According to Milton Friedman and others the sole reason sales is motivated as they are is because it is so easy to measure their performance. The impact on the bottom line is very easy to trace from sales, but once you get at few tiers "down" into the factory etc. it becomes much much more complex and distorted.

I agree totally that many of the grunts on the shop-floor have as much, if not more, impact on the bottom line. It is just so difficult to see.

[Ryan]

From today's 'Where Great Workplaces Start' blog: "According to the results of a recent national sales compensation survey released by ERC, in addition to financial incentives, organizations are also using non-financial rewards to motivate their sales teams. A possible reason for this may be that non-cash sales incentives can be used more flexibly and frequently than cash incentives."

I invite you and your readers to visit our blog today, it's got some interesting insights on what motivates sales teams and what companies are using as incentives.

[Mark Graban]

I did a podcast with the president of a company that, in Deming style, eliminated sales incentives.

http://www.leanblog.org/2007/02/leanblog-podcast-18-eric-christiansen.html

[John Hunter]

The impact of sales is not so easy to measure. How do you measure the impact of stories told to customers that set unrealistic expectations in customers? How do you measure the impact of sales people focusing on a bonus instead of a long term customer's needs. How do you measure the benefit of a sales region that has great customers? How do you measure the cost of stressing the system to meet the boom bust cycle created by quarterly sales bonuses? How do you measure the lost opportunities for learning from customers (if you reward sales, you discourage any other activities by salespeople - yes they still can be involved with improving your products but are they really)? How do you measure turf battles over who should be given credit (and bonuses) for sales? etc. etc. etc.

[John Hunter]

Here is an example you might appreciate. "The trash-disposal giant Waste Management is suing SAP, saying top SAP executives participated in a fraudulent sales scheme that resulted in a failed ERP (enterprise resource planning) implementation.": SAP Sued for Typical Ghetto Behavior (read comments too)

Sales people over-promising when they see their job as just making sales (which sales bonuses sure would lead one to believe - unless you provide higher bonuses for more systemic behavior I can't see how you could argue anything else is being re-enforced) and the resulting harm to the organization trying to cope with those promises is something Deming talked about at least 30 years ago.