Are Sales Commissions Hurting Your Business?

Sales commissions are widely used to motivate salespeople to sell a product or service. But is your business better off abandoning commissions altogether?
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Sales commissions are one of the most popular ways to reward salespeople and encourage them to meet their targets. According to the Harvard Business Review, businesses in the United States alone spend over $800 billion a year on sales force compensation. This huge figure stems from the need to motivate and reward employees for extraordinary performance. Many businesses, however, are choosing to move away from sales commissions and towards a more straightforward salary plan. You may be wondering, if employees can’t earn commissions, how can you ensure they’ll reach their targets?

Switching away from sales commissions to another plan is definitely not for every business. Every company has a unique structure, size, mission, and approach to sales, which means there is no one-size-fits-all solution. Some businesses are better off keeping their commission program intact, while others may find another system to be better suited to their needs. Below I’ll discuss a few common problems with sales commissions, and some benefits of using a system that isn’t based on sales figures alone. Read on to see if a switch to a different compensation program might be worth considering!

Issues with Sales Commissions

  • Misalignment between a salesperson’s goals and the company’s mission: when employees are compensated based on their sales figures, companies often find that their salespeople's goals are no longer aligned with those of the company or the customer. If a salesperson wants to sell as many products as possible in order to earn greater commissions, they may resort to slimy tactics to work the system to their advantage. This is clearly not true for all salespeople, but can arise in a very high-pressure environment, leading to unhappy customers and damaging the reputation of a company.
  • The role of the salesperson has changed: a few weeks ago I wrote a post that discussed how the role of the salesperson in 2015 is much different than it was decades ago. Technology has adjusted the role of a salesperson in the decision-making process--largely due to the amount of information that’s now available to customers on the internet. Whereas in the past, a customer’s only resource was a sales rep, nowadays they can use the internet to gather information themselves. One figure states that buyers are already 57% through their purchase decision before they even talk to a salesperson. While technology can provide data, salespeople remain vital to the sales process--they are often the final step in closing a sale and have the advantage of being able to educate customers on their products and services based on years of experience. Without having to worry about commissions, a salesperson can focus all of their energy towards building genuine relationships with their customers, which can lead to better sales.
  • Financial instability for employees: business cycles can be volatile--there are often economic forces beyond an employee's control that can lead to a slow quarter and fewer sales. In a bad month or quarter, employees may be unable to meet their targets and become stressed about their financial security. This article suggests there are other compensation options that are more stable than commissions and also motivate the salesforce, such as bonuses that split profits between employees.

The Perks of Abandoning Sales Commissions

  • Encouraged collaboration: without sales commissions, employees will be more likely to work together. They no longer have to compete for leads, so they can work together on securing bigger accounts and brainstorming better sales practices. Their attitudes will move from focusing on only their individual needs towards the needs of the company as a whole.
  • Better customer experience: when an employee is no longer focused on selling as much as possible, they’ll be able to act as a resource to the customer, devoting more time and energy to ensuring that the customer is happy. Customer service is as important as ever--with social media and the internet, one bad customer experience can be broadcasted to huge audiences in a matter of seconds. Happy customers, on the other hand, will turn into repeat customers, and will also spread the word to generate new customers, which is great for your business.
  • Increased revenue: a business owner in this article swears by his decision to stop using commissions, stating that switching from commissions to a salary system actually increased his company’s annual growth. The company still generated sales revenue without the commission system--employees were just compensated for their efforts in a different way.

Overall, whether you decide to stick to sales commissions or move to another compensation plan depends on the nature of your business. While some businesses prefer to continue compensating their employees based on sales figures, there is evidence that switching from commissions to a different system such as salaries and bonuses can benefit your business in the long run. If you’d like to have happier employees, offer a better customer experience, foster a more collaborative work environment, and increase your revenues, it may be time to consider abandoning traditional sales commissions.

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