No Commissions? Are You Crazy?

In a recent book, Drive: The Surprising Truth About What Motivates Us (Riverhead Hardcover, 2009), best-selling author Daniel H. Pink describes a groundbreaking experiment conducted in the 1930s by psychologist Karl Duncker. The results of that experiment should be posted on every sales manager’s wall.

Duncker would sit subjects down at a table next to a wooden wall and give them the following items: a shallow box of tacks, a candle, and a book of matches. Subjects were then told that their task was to attach the candle to the wall and light it so that the wax would not drip onto the table.

Most of the time, Duncker found, subjects would begin by trying, unsuccessfully, to tack the candle directly to the wall or to carefully melt one side of the candle and stick it to the wall. Within five to ten minutes, however, most subjects arrived at the proper solution, which involved tacking one side of the box to the wall and placing the upright candle inside the box.

The key to solving the problem, Pink says, is “functional fixedness” – in this case, the conceptual realization that the box can serve more than one function.

Jump Forward in Time

Decades later, psychologist Sam Glucksberg took the experiment a step further, dividing subjects into two groups. Subjects in the first group were told that they were being timed to establish norms for how long it would typically take a person to solve this puzzle. Members of the second group, however, were offered an incentive: If the participant’s time was among the fastest 25 percent of those being tested, he or she would receive $5 (the equivalent of $20 today).

Naturally, the group with a financial interest in finding a speedy solution to the puzzle finished quicker, right? Wrong. In fact, Glucksberg found, the incentivized group on average took 3 1/2 minutes longer to solve the puzzle.

Pink says that whenever he describes these results to business professionals, he invariably receives pained, involuntary gasps in response. The explanation for Glucksberg’s results, he says, is that, contrary to long-held beliefs, extrinsic rewards tend to narrow people’s focus on a task. But this narrow focus also tends to blind us to any solutions that lie on the periphery. In effect, he says, motivational “carrots” actually serve to depress our creative, problem-solving abilities.

What It Means

The results of this experiment, along with the substantial body of similar research that’s been conducted on human motivation, hold important lessons for the sales profession, Pink says. In the past, when much of the sales task involved a great deal of order taking, traditional carrot/stick motivators made sense; they helped keep people focused on the task at hand, which involved maximizing the volume of sales transactions. But professional sales has changed dramatically since then, and today most of those order-taking roles have been shipped overseas or moved onto the Web.

“To sell sophisticated products or high-ticket items, you need some decent human capabilities,” Pink says. “For that sort of work – the more creative, conceptual, consultative work that salespeople are doing – the if/then motivators don’t work well. So one can possibly see – not immediately – a recasting of the way salespeople are compensated.”

Pink recognizes that in some quarters what he’s suggesting borders on heresy. Asking sales organizations to give up commissions is tantamount to the Olympics abandoning the practice of awarding medals. Yet, he argues, if business professionals are willing to broaden their perspective, much like the test subjects imagining the use of a box as a candle support, they can see the truth behind his assertion.

“Often, when something isn’t working,” he says, “we don’t question whether the underlying assumptions are right. So we say, ‘The reason these carrots and sticks aren’t working is because we don’t have enough carrots or sweet enough carrots or pointy enough sticks, or we’re not hitting hard enough, so let’s ratchet that up.’ And in some cases that takes you down precisely the wrong road, because the solution is to abandon the premise and take an entirely different approach.”

At One Company

A perfect case in point is Red Gate Software, a Cambridge, UK-based company that provides archiving tools for Microsoft technology users. From the company’s inception in 1999, sales operated with a traditional commission-based structure. But in late 2008, out of concern that sales compensation had fallen out of alignment with bottom-line results, the company brought in an outside consultant to help “fix” the ailing sales-compensation system.

Red Gate CEO Simon Galbraith says that he had never been too involved in sales management before, and the experience opened his eyes to what he describes as the “endless management pain” of running a sales team.

“We had every problem under the sun,” he says. “We had people stealing deals, this person didn’t like that person, orders went through that shouldn’t have gone through, salespeople offered dramatic discounts to get deals done by the end of the month – every sort of misdeed and misbehavior coming out of people who seemed perfectly reasonable when you spoke to them. But when it came to actual work performance, it was like dealing with teenagers rather than grownups.”

After six to nine months of aggressively jiggering the comp plan and piloting different programs and nothing to show for their efforts – in fact, sales went down slightly – it dawned on Galbraith that the salespeople weren’t misbehaving; they were acting rationally based on what the compensation plan directed them to do. “The question we kept coming back to was, ‘What would you do if these were your incentives?’” Galbraith says. “And I kept saying, ‘Well, I’d do the same thing they do.’ Because that’s what people do. So then we said, ‘Well, since that’s not doing any good, why don’t we get rid of commissions and instead just ask people to do a great job?’”

No Commissions

When a one-month pilot program offering no commissions and guaranteed bonuses produced 10 percent higher sales numbers in one division in October 2009, Red Gate rolled out a new commission-free comp plan to the entire sales force. Looking back, Galbraith says that, much like Alexander the Great severing the Gordian Knot, eliminating sales commissions has created dramatic results in one fell swoop.

“Plotting our sales curve used to look like a hockey stick,” he says, “quite shallow at the start, but then toward the end of the month, as the pressure was on the salespeople to hit their targets, the line would shoot up. But today that hockey stick has disappeared. The last day of the month is no more or less likely to be a big day than the first of the month, but where the line reaches is actually higher now than it was before.”

Beyond the obvious balance-sheet benefits, however, Galbraith says that of particular interest are all the salutary ripple effects the company has enjoyed since doing away with commissions. Sales turnover has been nonexistent, there is far less internal conflict, salespeople no longer spend an hour a day rooting through each other’s deals looking to claim a piece for themselves and, with no internal competition, the overall level of customer service and collaboration has increased.

“Another interesting effect is that we used to run at about 3 percent refunds,” Galbraith says, “so in any one month we were actually handing back tens of thousands of dollars’ worth of deals. That’s just disappeared. And beyond the money, those refunds represented a massive organizational cost, since we had literally a team of people upstairs that spent most of its time chasing down a bunch of crap that turned out not to be there at all.”

Results Oriented

One senior executive who wouldn’t be surprised by these results is Jeff Gunther, the CEO of Meddius, a Charlottesville, Virginia-based provider of integration appliances for the healthcare industry. Meddius operates on the results-only work environment (ROWE) philosophy, meaning that employees are entirely responsible for their own schedules. They’re not required to come into the office at any specific time – or at all, in fact. The only requirement is that they get their work done. How they accomplish that is up to them.

Just as at Red Gate, Meddius’s salespeople work for a salary with no commission. Gunther says he pays his people well and provides health and dental benefits, not only because it’s the right thing to do, but also because he tries to take money issues off the table.

“Of course compensation is important,” he says. “Employees need to be able to feed their families and feel successful. But I believe that there are other things employees want that traditional businesses have not been able to provide. I believe they want autonomy, they want to be treated like adults, they want to have control over their own lives, and for many people that’s more of a motivator than, ‘Give me $10,000 more.’”

As Galbraith points out, however, it’s not easy to convey this message when the prevailing business atmosphere clings to a deep-rooted belief that salespeople are, in fact, a different breed. Repeatedly, he says, people would say to him, “Salespeople are coin operated. They’re just motivated purely by money.” He sighs as he thinks of some of the other outlandish ideas he’s heard that have been passed on as gospel.

“We were told, ‘You want someone who’s motivated by money, so someone who’s in debt or has just recently been divorced, they’re really good candidates to work in sales because they’re really motivated. When you want someone who’s money motivated, why not have someone who needs money?’” he recalls hearing. “But honestly, to whom do you want your customers to talk? Some brilliant young graduate who can really understand their problems, or a guy who’s actually thinking about whether he can pay his debts at the end of the month?”

The Human Condition

Pink says that the premise underlying such traditional motivational approaches is that human beings are fundamentally inert, will choose to sit around like lumps, and won’t care about quality or excellence if they’re not enticed with a carrot or threatened with a stick.

“But if you say, ‘You know what? I think most people are like me; they actually care about doing a good job, and they want to do something valuable,’ then that leads you in another direction,” Pink says. “And I’m convinced that salespeople are not fundamentally wired differently from other human beings.”

Gunther says his results bear out Pink’s conclusions. Not only do salespeople not burn precious calories on what he calls “Mickey Mouse stuff” that doesn’t serve the company’s best interests, such as discounting or delaying deals from one quarter to the next, but he says he’s also been freed from all the management hassles others face when trying to micromonitor sales compensation. The company has been profitable every quarter since its founding, he says, the result of employees who feel valued as individuals and more loyal and passionate.

“My father’s generation viewed people as human resources,” he says. “That term implies that they’re all just cogs in a machine. But I view them – and their significant others – as partners. So I want the father to have the ability to spend time with his daughter in the morning before school and not have to rush in to get here by 8:00 a.m. And our experience from the last year or more is that you wind up with intensely loyal employees. They’re more disciplined, go above and beyond, and battle much harder to help solve your problems.”

Why They Sell

The larger question Pink suggests executives ask themselves is why their sales team members are there, and what’s most likely to push them to generate results that genuinely help achieve the organization’s long-term goals. “If you have a sales force that is only energized to sell your product to get the commission, you have a problem,” he says. “You need people who are stimulated by something larger, by a sense that this product or service or experience is actually going to be valuable to customers, that’s it’s actually going to change their lives in some way. And that makes you think about who you want to let in the door to be a salesperson.”

Despite the myriad struggles caused by the down economy, Pink notes that recessionary times do force organizations to reassess, reevaluate, and reconsider their processes and practices. Smart companies will take this opportunity to rethink how they incentivize sales behavior as well, he argues.

“I do think this heavily carrot/stick motivational system is just chugging its last gasp,” he says. “Individual incentives are very good at getting numbers to go up in the short term, but they’re not the best way to serve and delight customers in the mid or long term. So the question is whether we say, ‘OK, let’s use it for where it works and come up with something better for when it doesn’t,’ or if we continue to try to rehabilitate this thing and face continued problems down the road.”