At the start of 2012, ThoughtWorks, a software company based in Chicago, decided to upend one of the sacrosanct principles of sales. It eliminated commissions and placed its entire sales force, a team of 40 stretching across 12 countries, on straight salary.
“About 2½ years ago we started to realize that commissions were getting in the way of our company’s ability to achieve our mission and purpose,” said Craig Gorsline, ThoughtWorks’ president and chief operating officer.
To many in the highly competitive world of sales, such a move is tantamount to blasphemy. But Gorsline and his top executives concluded that the world had changed since ThoughtWorks opened in 1993. Twenty years ago, the company’s clients needed sales representatives to explain pricing and polices. Today, the Internet has made such information widely available.
“Commissions were getting in the way of a proper dialogue with our customers,” Gorsline said.
ThoughtWorks is not alone. A host of companies are rethinking commissions and the role of sales representatives.
“The carrot-and-stick model has diminished the rate of return on performance,” said Tom Searcy, chief executive of Hunt Big Sales, a consulting firm based in Indianapolis. Thanks to the Internet, Searcy said, even before a sales agent shows up, “the customer has done the work comparing vendor solutions, checking scores of comparisons from users and buyers.” That, Searcy said, is why, in large part, he believes the commission-free sales force is the wave of the future.
The proponents of ditching commissions believe they foster negative behaviors, such as focusing on an individual’s profit over the company’s, emphasizing short-term outcomes and encouraging unproductive competition among sales representatives. Even companies that pay commissions can face costly turnover as representatives chase more lucrative offers. But to do away with commissions altogether raises a concern that these companies share: Without them, can they attract and keep top sales agents?
Over the years, ThoughtWorks had prided itself on developing a culture based on collaboration. But some parties in the sales equation appeared to be operating at cross-purposes.
“We made the decision to take the individual incentive out of the picture,” Gorsline said, “and instead focus on the customers and their pain.”
Throughout 2011, the company worked on a strategy. During that time, Gorsline and his team brought the entire sales force together to discuss the new direction, explain the rationale and provide a forum for discussion.
“It was all very transparent,” he said.
Next, they met with individual sales representatives to establish a new compensation plan. A start date of January 2012 was set.
According to Gorsline, the straight-salary structure took into consideration high performers, offering them compensation close to what they had earned with commissions. Still, all of the representatives took pay cuts — although they did gain something: a steady paycheck.
“We operate in a cyclical industry,” he said. “This provided them with a sense of security whether it was a good year or a bad one.”
Still, about 10 percent of the representatives quit.
“They clearly didn’t like the approach,” Gorsline said. “But in the grand scheme, that was OK for us. We were then able to use this as a filter during recruiting. We ended up with better candidates, aligned with our overall mission.”
More important, Gorsline said, the company’s annual growth spiked between 18 and 22 percent in each of the past two years.
“We still demand revenue generation,” he said. “The only thing that changed is the way they are compensated.”
This is not an entirely new phenomenon. In 1991, Terry Ortynsky, the founder and owner of the Royal Auto Group, a car dealer in Saskatchewan, Canada, with annual revenue of 75 million Canadian dollars, stopped paying commissions and ended all incentive targets for his sales team — something almost unheard-of in car sales.
Confronted with chronic high turnover in sales, Ortynsky concluded that “there was a conflict between doing what was right for the customer and an individual who wanted to earn a higher salary.” Because the real goal is to build relationships with customers, Ortynsky said, “it’s a team effort, and you can’t really divvy up commissions in that situation.”
That is a sentiment New York Label & Box Works has espoused for the past 135 years. The Islandia, N.Y., company, which produces about $20 million a year manufacturing specialty packaging, has categorically refused to pay commissions.
“There are so many reasons,” said the company’s chief executive, Steven Haedrich, including overselling to clients to satisfy earning targets, and a corrosive work atmosphere.
Those concerns led Fog Creek Software to drop commissions in the spring of 2011. Founded in 2000, the company, which is based in New York City and develops project-management tools, had created a system to assign, monitor and manage its sales staff — including calculating and paying commissions. But as Rich Armstrong, Fog Creek’s general manager , recalled, “We underestimated how hard it was to set up a system that rewarded the exact thing we wanted to reward.”
Fog Creek executives found themselves spending time devising internal systems to track sales assignments. Issues arose over sales representatives maximizing their own numbers rather than concentrating on the good of the company.
To the company’s surprise, many of those who gave up commissions supported the decision.
“The chief thing that the sales reps wanted was to be included with the main work of the company,” Armstrong said.
At a company founded by software developers and for software developers, he said, “anyone who is not specifically writing code can feel cut off from the action. This was as much a cultural change as anything.”
But that approach is not for everyone. When RJMetrics, a software company that helps Web retailers track their sales metrics, opened in Philadelphia in 2008, it decided not to pay sales commissions.
“I was worried it would poison the culture,” said Jake Stein, one of the founders. This year, however, the company had a change of heart.
With 34 employees and annual sales of more than $2 million, the founders want the ability to offer incentives for tactical things, including the ability to bring customers on board with long-term agreements.
To attract the best sales team, RJMetrics has concluded, it must pay commissions.
“We have a great culture and we can win on those things,” Stein said. “But we wouldn’t want to have a big question mark and have someone think twice about working for us because somewhere else there is a better offer.”
RJMetrics plans to put the new model into effect next year.