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Sales Commission and Unintended Consequences

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Commission Compensation and Unintended Consequences: A Quick Review

This post is a tangent to my previous post “Recruiters: Dancing with the Devil” about some of my misgivings about the recruiting industry. Here is a quick summary from that post and the key takeaways that are typically correlated with commission heavy industries (note: “recruiters” and “commission sales employees” are relatively interchangeable for the purpose of this post):

  • Recruiters have misaligned incentives from the needs of their clientele.
  • Their incentives also make it a dog eat dog industry, volume is the name of the game.
  • The unspoken role of a recruiter is to sell the employee on the company and the company on the employee. How does either side know the truth?
  • Recruiters drive up the market. It is the same as a real estate agent coming to you and convincing you to sell your house above the market rate and at the same time convincing another buyer that is what they will have to pay to own a home.
  • All of the above issues stem from misaligned incentives. It’s an industry inherently designed to “churn” product similar to most other heavily commissioned based companies.

Why Commission?

You can always tell when you are in a store where employees are making a decent or relatively large portion of their income from commissioned sales. They pounce on you the second you walk in the door. They make sure you know their name. If another employee greets you afterwards, you can witness the hush conversation off to the side about who greeted who first. They will tell you something that doesn’t quite sound right but you can’t say for certain if its true or untrue. If you do actually buy something, you might get the sob story afterwards that if they don’t get all “10s” on a survey they won’t get paid as much or at all if you don’t actually take the survey. Do any of these sound like a fun customer experience? And while you are thinking of the numerous times you have experienced these situations, what are some of the industries we typically see this behavior?

  • Automobile Dealerships
  • Furniture Stores
  • Finance/Insurance
  • Clothing and Beauty Products (some)
  • …and of course Recruiting!

Good Products Don’t Need Hard Sells

Many of the purchasing experiences listed above are a necessary part of life, but often dreaded processes with the only real fun often being the moment you leave and know that you don’t have to go back for a while. I often wonder why a company would rely on a heavily commission based compensation program to incentivize its employees to begin with. Especially when any of these experiences are known to many. Obviously we want employees to be incentivized to perform their responsibilities in the best possible manner. However, simply slapping a high value bounty on a numbers game is going to only do one thing…place a high value on conducting a large number of transactions. Is your product that bad? Are your margins so thin that you can’t afford to pay any other way? If your product is a “hard sell”, then I most likely don’t need your product.

The Cream Rises

Luckily, from time to time, we come across salespeople in these arenas that have figured out the game and know that the best way to a customer’s heart is to show they have a genuine interest in what is best for the customer. Arm the customer with good information and make them feel comfortable and odds are they are going to walk away with the product in question. Even if they do just walk away without buying, odds are they will refer the name or brand to someone else. They now understand the product and while it wasn’t a good fit for them, they will be more than happy to refer it to someone else. However, these types of individuals are rare gems in the cutthroat sales world. They just happened to last because they were good. More often than not when dealing in these types of industries you are getting the NOOB that isn’t expected to last 6 months. Its a sink or swim environment at the customer’s expense.

Let Science Do the Talking

There is a little known law of the human kind known as the Yerkes-Dodson Effect in which arousal or monetary incentive (err…arousal) tends to increase performance up to a point as to where the return/value decreases and then ultimately has a negative effect on performance.

Graph of the Yerkes-Dodson and its observation of stimulus vs performance.

Graph of the Yerkes-Dodson and its observation of stimulus vs performance.

Humans Respond to Incentives

The presence of money as an incentive changes they human psyche from that of social norms to market norms. Instead of a social incentive to help that individual, one’s brain reverts to personal incentive on how to help that individual. Is this customer really going to buy? What are they wearing? How old are they? How much money do they have? These are the questions the salesperson now instinctually begins to ask themselves when deciding who,what, and how to help customers. Particular answers will subsequently determine how much effort they will apply to the given situation. A multitude of other behavioral experiments have shown that when money is involved, human interactions tend to become inherently selfish and we lose some of our altruistic nature. Perhaps the best illustration I can give is this animated talk from Daniel Pink as the main thesis of his book “Drive: The Surprising Truth About What Motivates Us.” Certainly worth a read if you are the reading type. If not, watch the video, you’ll get the gist.

The Hard Road is Better

Motivation and incentive are a tricky subject for sure. Ask any parent. The correlation of parenting and managing employees are the same. It’s simply a construct of getting another human being to perform at a higher level than their default state or natural tendencies and abilities. Which is why parenting gets harder as children get older. As a child gets older, one can no longer use authority, manipulation, and bribes to control behavior (which probably isn’t good to begin with but sadly its the seemingly easy button of parenting, I plead the 5th). Instead, inspiration, reason, and logic have to be the new methods, lest you want a rebellion on your hands. Ask any parent of a teenager. Authority, manipulation, and bribes sound like cheesy sales tactics to me. In the end I don’t think I’d want to do business with a company that that is not going to properly incentive their employees in a manner that has my best interests at heart…but perhaps I will anyway. Not because you or I are a sucker, rather we are human too. I just won’t be happy about it.

Thanks for reading.

Sincerely,

Russel "The Backboard"

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