Low sales is FAR worse than high commission payments

I can’t name a single business that has failed as a result of over-paying sales people.  Its probable there are a few, and I’d love to hear that story if you know of one.  Its certainly possible to create a sales compensation package that is overly generous – but in general, commissions are designed to be a percentage of sales.  Therefore, by definition, if commissions are rising, then so are sales.

I want to clarify that I am talking about normally designed commission plans.  I do completely understand that you can design a compensation plan that doesn’t take into account the cost of doing business, etc. so much so that even as sales rise, you wind up killing your business.  However, what this post is about is not poorly designed commission plans, its about what you as a sales manager and entrepreneur are focused on when you think about paying commissions.

What will kill a business significantly faster than paying commissions is LOW SALES.

Recently, I was talking to an entrepreneur whose business had next to zero sales.  He looked to me for advice.  My advice was to make his sales compensation plan more generous.  He nearly had a stroke.  He picked and prodded at every suggestion until he essentially killed all improvements I attempted to make.  The crux of his argument was that he was able to identify a potential way for salespeople to take advantage of any improvement I was trying to put in place.

For example, there was one instance where he wanted to make sure we did not pay a sales rep double commission, if they sold double the items to a single client.  He wanted to make sure we were discounting (or actually NOT PAYING on) multiple sales.  I explained that in his early stage, the last thing we wanted was an disincentive against getting lots and lots of sales.  We were too young to be thinking with that much granularity.  I figured out that IF every sale by EVERY rep committed this sin, he was going to pay $7,000 in extra commissions that month – and in that case, we could institute new rules at that point.  He disagreed, because to him, paying extra commissions was the worst thing that could happen.  Salespeople should NOT be allowed to take advantage of him.

I sat there, looked at him and said, “If I said that I could deliver to you the perfect sales solution for your company right now, would you pay be $40,000 on the spot?”  He said “Of course!”  I said, “So then why would you not risk, at max, less than 25% of that amount to let the sales reps run and maybe learn something about your product, how its sold, how people want to pay, how much they want to pay?”

Critical to any start-up is the ability to let the reps run and learn from how they sell.  Last year, another start-up I worked with, experimented like crazy and paid lots of commissions.  In retrospect, some of the commissions paid were probably too high – but the end-result?  They are a profitable company with a great sales team and a great compensation plan.  Had that client worried too much in the beginning about optimizing his process to NOT pay sales commissions, he would likely be dead by now.

The main point here is that, in the beginning, you need sales.  Without sales, you are a product not a company.  Without sales, you will die.  I don’t think any start-up should overpay salespeople just for the sake of it – but I encourage startups to not optimize for NOT paying salespeople.  Optimize for getting the most sales – you can always scale back if you see something is too generous.  (Of course, there are challenges here to not destroying morale which I will discuss in another post.)

If you do optimize and determine how to make sure that salespeople do not get overpaid, the most likely solution is that you will have a salesteam that doesn’t deliver breakout sales, and ultimately, a company that can’t survive.