Raising the discussion about compensation for those charged with ad agency new business.
It is time to re-think how we compensate those “odd ducks” who do what no one else wants to do, selling the agency’s services. The motivation for creating new business opportunities is thought to be fueled primarily by financial rewards, the traditional ‘carrot and stick’ philosophy. If you remove the dangling carrot as an incentive, new business activities will quickly dissipate.
In a recent Harvard Business Review article, Daniel Pink challenges the ‘carrots and sticks’ philosophy as the wrong way to motivate sales people today. He makes the pont that commissions can sometimes do more harm than good and he provides a good example of a company that eliminated sales commissions resulting in even higher profits.
The ‘Carrot and Stick Philosophy is Outdated’
The memorized sales script made sense for the “door-to-door” salesmen 40 years ago. But the salesperson today needs complex skills such as being able to interpret information and provide insights and have the ability to solve established problems and identify new ones on the horizon.
From Daniel’s point-of-view skill-sets aren’t the only thing that have changed about sales.
If you do this, then you get that” [if-then rewards] works well with routine tasks social scientists dub “algorithmic”. In other words, pay is a motivator when doing simple, repeatable tasks.
However, those same rewards turn out to be far less effective for complex, creative, conceptual endeavors – what psychologists call ‘heuristic’ work. This like you are inventing a new product or working with a client to tackle a problem neither of you has confronted before. For those projects, you need a broader perspective, which research shows, can be inhibited by ‘if-then’ rewards.
A Company That Eliminated Sales Commissions
Daniel highlights Microchip Technology, a large semiconductor company headquartered in Phoenix. The company’s sales force of 400 were compensated by the industry standard: 60% base salary and 40% commissions.
In the late 1990s, a radical new approach that killed commissions altogether was implemented by Mitch Little, their vice president of worldwide sales. Little perceived that the world of business-to-business sales had fundamentally shifted.
Under the new plan, salespeople received 90% base salary and instead of individual measures, 10% of their compensation linked to corporate measures: top-line growth, profits, and earnings per share.
- Total sales increased
- The cost of sales stayed the same
- Attrition dropped
- Retention rose
- 86 consecutive quarters of profits
- Consistently stays among the top-performing companies in the semiconductor industry
Over a decade later, Microchip still maintains its commission-free 90/10 system (not just for the sales force, but for almost everyone who isn’t an hourly worker, including their CEO).
Daniel raises a legitimate question that agency owners should consider, “Is the financial bonus what really motivates your agency’s salesperson?”
Some things in life we know are true. The sun rises in the East and sets in the West. A body in motion will remain in motion unless acted on by an outside force. And the best way to motivate salespeople is by offering them commissions.
But what if we’re wrong, at least about that last one?
What if paying salespeople commissions is rooted more in tradition than logic? What if it’s a practice so cemented into orthodoxy that it’s no longer an actual decision? That’s what a handful of companies have begun discovering. To the surprise of many, these firms are showing that commissions can sometimes do more harm than good – and that getting rid of them can open a path to higher profits.
Click on the following link to read Daniel Pink’s Harvard Review article, “A Radical Prescription for Sales”. You will find an additional review and insights from Forbes contributor, George Anders’ article, “America’s 9 Million Salespeople Are Being Paid the Wrong Way”.
For further reading about this subject, I would encourage you to purchase Daniel’s paradigm-shattering book, Drive: The Surprising Truth About What Motivates Us
Additional articles that may be of interest:
- Ad Agencies Should Be Pricing On Purpose for New Business
- Ad Agency Compensation: The biggest frustration of CMOs
- Nobody Reads Ad Agency Blogs
- A 70 Point Checklist for Jump-Starting or Tuning-Up Your Blog for New Business