I Fail Way Too Much

This past weekend, I was on a chairlift in Mt. Snow, Vermont - and had the occasion to ride the lift ..... by myself.   All the way from the base of the mountain, to the top. 

It was a warm day, and I decided to take out my Iphone, and take a picture of the gorgeous Vermont skyline, as I started my ride up the lift.   

But, first - I opened my email, before clicking on the camera function of the phone.  

The email at the top of my inbox was from a good friend, and a trusted colleague.  

He wrote in the body of the email...

"Why do we pay Sales Commissions?"  - with a link to blog post, which is HERE.

I was mad.  My blood pressure went up (before even clicking on the link he wanted me to read)....I thought to myself, "how could someone who is not in sales send me a link to a story that questions the way sales people are compensated?"   

The view of the Vermont skyline suddenly was not looking as gorgeous as it did when I got on the lift, the clouds turned dark -- as did my mood.  

And then I read the blog post.   Its from Fog Creek Software.   I highly encourage you to read (before continuing) the insightful, challenging, and downright questioning (in an articulate fashion) the model for sales compensation.   The blog post is here.  

From the post:

 "Among our many cherished verities and assumed assumptions is the widespread belief—nearly universal practice actually—that salespeople are to be paid commissions. It’s the way things are done. Stop signs are red. Salespeople get commissions.

But why?

This is a practice so deeply ingrained that almost everyone assumes that commissions are an unalloyed good, and that salespeople won’t work without them. I’ll return to that notion about work shortly, but it’s somewhat amazing that commissions are so widely lauded when they come laden with so many recurring problems. These issues pop up with distressing regularity."

As with most things in life, some tasks are harder than others. 

For instance, hitting a baseball is considered to be the hardest task to do in all of sports.  Hitting a baseball, consistently for a high average, (amount of times you get a hit, versus the amount of at bats you take) will most likely get you inducted into the Baseball Hall of Fame. 

As an example, yesterday, Barry Larkin of the Cincinnati Reds was voted into the Baseball Hall of Fame, and here are his lifetime stats: 

Over a 19 year career -  He played in 2180 Games. 

He had 7937 AT BATS. 

He got 2340 HITS 

His lifetime average was .295 

On average, he succeeded 295 times out of 1000 attempts.  

I tried to calculate what I believe this looks like for a sales person, using similar type statistics and replacing the baseball terms, with SALES terms.  (the model is around sales packages for high ticket items, considered purchases like technology or a large software package, it is NOT for small items, or low consideration purchases)

Statistics of a sales person over 19 years:

Sales person has made 71,250 phone calls and emails to prospects. 

Sales person receives a response or makes a connection (meeting) on 3562 of these calls 

Sales person turns these 3562 calls into 285 sales for the company.  

Sales person batting average is 0.080%  meaning the amount of meetings divided by the closed sales.   (equivalent of an at bat to a hit) 

What does this all mean, why am I trying to put Baseball language and stats into a Sales Language of activity, -- prospecting, cold calling, getting meetings, and closing deals? 

Because in baseball you can bat .295 and get in the Hall of Fame. 

In Sales, you can bat .8% and be either a hugely successful sales guru, or something in between  -- selling major packages for companies, big ticket items, and succeed less than 1% of the time.  (versus 30% in baseball) 

So, what gives? 

In a word, it comes down to this:   FAILURE.   How to deal with failure. 

I think a true sales person is compensated for 2 things.  

a) how many deals they close, and how much profitable revenue they can bring into a company.

b) how well they can compartmentalize failure, and how in the face of such abject dismissal of their message, or product -- how well they can rebound, and be successful in the face of constant rejection from the prospects (at bats in baseball) they are looking to get hits (sales) from.  

A few notes on ingredients that make a good sales person: 

1) They know failure sucks, and they also know how to manage feeling sucky 99% of the time.  This is not easy.   Managing yourself to know that your disasters and misses will far outnumber your wins or hits.   Sales is not for everyone. 

2) They are aware enough to know about who they are, as well as about how others view them, to know they are selfish (or viewed as self serving by their non sales co-workers and peers) self identification - and that they are motivated not solely by greed, but by fear of failure.   (this is a whole blog post coming soon) Being introspective, and at the same time having an inflated sense of ego -- in order to motivate yourself, for yourself -- is hard.  Sales is not for everyone.  

3) Being a Team Player - and are willing to help and develop a better product.   Making constant positive recommendations for improving the product, roadmap, or vision of the company.   

4) Sharing wins, and more importantly losses with the team, so that you are educating the company on what is happening in the ecosystem.  Being confident enough to share losses, and shoulder much of the responsibility for the losses, or failures that happen on your watch.....or in your territory.   

5) Greed -- just enough Greed in a sales person to want to make them win.   Greed enough to make points #1-4 above, GRAVY.   Greed is good.  Fear of failure is better.  

 

I would argue that a sales commission plan should address the 5 points above.   It should be simple enough to, understand failure.   Reward self awareness, reward motivation -- and reward making the company smarter.   Most of all a sales commission plan should reward greed --- and the thing that closes deals -- but in the end it should, REWARD FAILURE MORE.  

More failure means more at bats.  More at bats puts you, and the company that much closer to a sale. 

Without a commission plan -- there is no accountable way to deal with the daily humiliation of failure and rejection.   There is no way to account for, and to acknowledge the constant reminder of, "why people dont return my calls and emails?"  No way of saying why people say, "I'm not interested."   No way of compensating prospects who are apathetic, and worse yet -- dont give a hoot about you, or your product.  Here are the Four Obstacles to Closing.   They all involve FEAR, and they all involve constant, persistent and mind numbing rejection.  Its like walking around with a Scarlet Letter in your gut that reads, "I failed today, and I was rejected over and over...."    No one can see it except you.   As a salesperson you carry on, and try to - smother the negative feelings inside, so no one can see.   

People who choose to work in MARKETING cant deal with daily failure.  People in Marketing Depts. would freak out if they heard from their peers, "your message really sucks, I really dont like what your are trying to communicate, and worse yet -- I do not care about you."   They might take it for a day or two.  Not every day.  We would have alot less college graduates who pursue marketing as their major.    

Engineers who like to solve problems could not live in a scenario where everyday instead of building something, they were faced with a life of code that was forever failing and causing sites to crash, and problems to not get taken care of.  They could not deal in a world where there are problems to solve, but no one to test out their thesis, no one to let them know if their problem solving techniques worked.  They would be faced with a constant closed loop of, emptiness of answers.   Failure doesnt work for long periods of time with Engineers.  

It runs counter to their workplace DNA.  Failure and rejection are a GREAT equalizer for any and all ego's.   

Sales Commission plans are often misunderstood, as too complex, require too much attention -- and frankly don't reward failure, ENOUGH.   

Maybe Sales Commission plans are not the answer.  But, I know this.

Socialism in theory sounded amazing to me in college.  I had a professor, Dr. DeAngelo who sold me (and every other wide eyed college student) about the value of "collective thinking" - about the virtues of equalism, and about the "truism" of social good for all---over the individual greed of the few.  It sounded so good.  

I bought into it.   Thankfully, I only bought into it for a short while, and I opened my first real paycheck in 1991 -- still embracing this thought that money was not that important to me, I could just get by, and be "socially aware" (more enlightened even though I was making less) -- and I ripped open that first envelope, with a real check in- for 2 weeks worth of effort.    

$395.21  NET

My $24,000 salary was not earning me a life to live......it was earning me a life of want.  It was then and there, that I said to myself -- I can do better, and I will. 

It was the beginning of me realizing I wanted to be a sales leader.   In return for (my decision to go into sales) my acceptance and embracing overwhelming failure, I would be compensated if I could bat 1%, or better.   The truth is, I bat alot higher than 1%, and I was a "one percenter" before the OWS folks hijacked the term....my speciality is being a different sales person, and I've been justly rewarded since I opened that first paycheck from Norwest Financial, in San Diego.  I will never forget opening that paycheck on a Friday night, in Ocean Beach -- eating Fish Tacos.   I think I drank away $100 of my 1st real paycheck that night.........and, I never looked back.  

So, in the end - I'm against most sales commission plans (including the one I helped build) at Lotame.   Its too complex, too hard to manage, and too fraught with grey areas.   I'm guilty, I admit it.   I agree with Fog Creek.   I agree that in general sales commissions may not work properly. They may not incent the behaviors we want to drive  -- or the results -- But.......

Maybe its time to look at a different way.   I'm honest enough with myself to know when a plan is not rewarding the good behavior a company needs -- then it should be willing to quickly embrace something else.   Hats off to Fog Creek software for having the foresight, and ability to change their sales compensation.   I was once able to "game" a sales commission plan, to the tune of an additional $100,000 a year for myself.  Did I do something wrong, or just expose the hole in the system to gain benefit for myself?   I did not do anything illegal.   They closed that loophole pretty darn fast once they saw me, "drive the proverbial sales commission bus, through the back of their corporate garage."   

I may not be ready to end sales commission altogether.   But, I am open to making it more simple.  Easier.  And, in the end -- a mechanism that rewards and acknowledges failure in a way that is currently not done.    

* I asked some peers in the industry to weigh in with their thoughts on this topic, and as you will see below, each of these folks had their own view of potentially, "Getting Rid of Sales Commissions.*"    Your thoughts are welcome in the comments section below.  

I fail way too much.   And, I like it.   I guess I'm weird.   

Here is what others had to say: 

Michael Lazerow, CEO and Founder - Buddy Media. 

"Eliminating commissions from sales incentive plans would be like eliminating the engine of a car and expecting the car to run properly. Anyone who says otherwise is just driving downhill and letting the car run. Commissions aren't the issue with most companies. The structure of the commissions is the problem and there's no need to throw the baby out with the bathwater.

The most important part of the commission plan is making it simple. If your team is spending 20 percent of their time figuring out what is owed them, you haven't set up the right incentive plan.  Make it simple and there's no confusion.

Many software companies with a monthly licensing fee pay one month's license payment to the sales person. And on renewal, the support or success team often shares in the commission with the sales person. So there's incentive to bring in business and renew the business. Renewals are directly related to the effectiveness of what you are selling and the contentment of the client, both of which can be managed for in a proper plan." 

Jonathan London - President - The Improved Performance Group

 

"The question of whether you should pay commissions or not reminds me of the argument of communism/socialism vs. capitalism.

 

In theory, communism and capitalism achieve similar goals of financial equity for all. As we know, neither work that way but capitalism certainly is a stronger approach to creating wealth.

 

To take incentive away from a salesperson is socializing sales and even though in concept it can work, it won’t. Your best salespeople are motvated by success, recognition and money. Find other ways to promote teamwork, respect, and recognition, but taking money away from your salespeople is the wrong approach."

 

Robert Daniel, VP of Sales - OwnerIQ

"There is a lot of merit to what Dan Ostlund wrote and he brings up a very intriguing idea.  I think the key to running an effective sales team is hiring the right people and then training them effectively within the right company culture.  A good commission plan can certainly help drive revenue but there are numerous other factors that impact sales more than the specifics of a commission plan.  I favor straightforward plans where sellers know how much they make on each contract they sign and I strongly dislike accelerators and decelarators in an Account Executive's commission plan.  I also dislike goal based compensation because the goals can be very subjective and you are guaranteed to get them materially wrong for many of your Account Executives." 

Bruce Budkofsky - VP of Platform Sales - Lotame 

"I'm in favor of sales commissions for salespeople.  Most salespeople, especially the most successful salespeople, are motivated by money.  They know that the better job they do of managing their time and prioritizing their workload, the more money they'll make.  The idea of having a "cap" on one's income takes away one of the largest motivating factors of a salesperson.  Commissions also give salespeople a reward for doing all of the difficult things that most salaried employees don't like to participate in, such as cold calling, presenting, negotiating, entertaining and networking.  The best salespeople are outgoing and confident.  They've got tough, thick skin.  They're used to and can take rejection because they know and believe that their next deal is just around the corner.  Commissions also give these revenue-driving employees a share of the profits.  It's a way of rewarding the people who drive the most revenue with a larger piece of the company's profits.  Commissions, when factored properly, should properly reflect the long-term value of the business that the salesperson brought in.  Relationships play a large role in sales today.  There's more competition than ever before.  Continuing to pay salespeople a commission on renewals gives salespeople an added incentive to maintain their relationships with their clients.  If no one (but the company) is compensated for repeat business and no one's compensation is tied directly to repeat revenue, then no there's less incentive to keep business.  When it comes to commissions, I'd rather see everyone compensated on commission, rather than no one.  Then everyone is working for the same reason...to generate new business and to keep those clients happy.  In my experience, when you assign "everyone" to a specific task, then no one does it.  Everyone thinks someone else will do it.  When you assign specific people to specific tasks and accounts, then they know their responsibilities and they can be held accountable.  The bottom line is that when someone's pocket is tied to their performance, they're more likely to perform."

Adam Lehman - GM of Platform - Lotame 

I do think there's a factor missing from the analysis, and one that often drives the commission culture - that businesses can't survive without revenue; and unlike product or service, generating revenue is dependent on convincing someone outside the organization to act, and act in a substantial way.  Knowing how difficult it can be to generate that action, and how essential it is to the survival and growth of a business, we provide a special incentive to climb that particular mountain.  

 

Comments

[Greg Hagin]

In the name of all that is holy and sacrosanct to salespeople (i.e reward), this is one of best posts you have ever written. The successful salesperson dynamic that comes from being introspective and self motivated, versus the ego and extroversion, is endlessly fascinating. Keep batting .010 you are a star!

[Andy Monfried]

thanks Greg. appreciate the kind words. the dynamic of failure, ego, positive karma, and bravado -- are a daily mix that is not for the faint of heart.

only sales people who want to (and consistently) strive to be different than the rest.

[Rob Deichert]

Andy this is one of your best posts. It's clear that many sales comp structures are poorly implemented and that's a cause of serious dysfunction. I would challenge the fog creek situation because it was a transformation of an already in place team. If this was a build from scratch situation I think you'd have a very different outcome.

You've inspired me to write-up my thoughts on how to evolve it, at least from a media sales side.

PS - can I assume the $100K situation was the gross margin kicker we had back in the ad.com days?

[Andy Monfried]

Rob - thanks so much. I respect your opinion, and it means a lot for you to weigh in here.

The reference to the 100k WAS NOT Ad.com, it was IKON -- and I was able to work closely with my clients on DSO. (days sales outstanding) -- a way of looking at how fast/slow clients paid their bills.

Here was the deal: In the legal business, law firms typically waited to pay their bills to their vendors (me) - until the clients paid them.

As an example, we would do copy work for a firm, lets say a $50,000 job on April 1st.

We would bill on April 30.

The firm would not bill their client until May 30th for the work. Client takes 90 days to pay - thus you see -- the company was "floating paper" -- and the average DSO was 130-180 days. Law firms WAITED till they got paid -- to pay the vendors.

This caused huge problems.

Ikon said in their commission plan to sales reps, "if your average DSO was BELOW 30 days, you get a 20% automated increase in every commission check for that month. "

You better know that I schmoozed every AP person, and I wined and dined every accounting person at my law firms.

My average DSO?

48 hours.

:)