Are commission-only pay structures a thing of the past?
There's a mini-revolution going on in salesforce remuneration: in many companies 'commission' is becoming a dirty word.
The hard sell is one of the life insurance industry's traditions, but firms are increasingly switching from commission-based systems to salaries. Barclays Life is an example. The rest will soon be forced to follow, believe many pundits. Customers need to be able to trust the advice they receive from a salesman, and they will not buy policies where the first year's premium gets swallowed up by his commission. 'It's only a matter of time before commission-only salesforces disappear,' thinks Jim Watts of Hay Management Consultants, which advises companies on remuneration matters.New regulatory requirements are driving many of the changes in financial services. But the current rethink is more widespread, reflecting a fundamental reassessment of the role of selling in many businesses. When the Korean multinational Daewoo launched its cars in the UK recently, it made a point of letting customers know that its sales staff were commission-free. Indeed, the salesman has made way for the 'customer adviser'.
Car buyers don't like being hassled. Therefore, says a spokeswoman, 'Staff are there to help, not to chase round after customers in the hope of making a sale'.
According to current theory, commission-driven pay structures tend to create conflicts of interest between salesperson and customer. The salesperson is given a powerful incentive to sell a product that may be inappropriate - even damaging - to the purchaser. At the same time companies are realising that a reputation for good service and ethical practice can attract far more business over the long term than an aggressive, hungry salesforce.
Even when they retain an element of performance-related pay, firms are subtly changing their definition of performance to include not only sales generated but customer satisfaction and other aspects of total quality. Thus the electrical retailer Richer Sounds asks every purchaser to complete a questionnaire about the transaction for head office. Staff bonuses depend on the customer satisfaction rating that each one receives. Some financial services companies are beginning to reward retention: the longer a policy stays in force, the higher the bonus. 'Properly structured motivation is about acquiring and keeping customers,' says Phil Forrest, chairman of sales training group Aegis.
At Quicks Group, the Manchester-based motor distributor, bonuses depend on meeting service criteria such as on-time delivery. 'Quality has become a way of life,' says Jim Quick, the company's sales and marketing director. To reflect this outlook, the balance of rewards has changed. 'Twenty years ago a car salesman's salary could be as low as 15% of earnings. Today the basic salary is 65-70%.' Of course, what's required of a salesman varies markedly from industry to industry. Business-to-business sales personnel have always concentrated more on building relationships than, say, car dealers. In packaged goods, the rise of the national account manager means that selling is fast becoming professionalised. Cultures differ too. The hard sell of life insurance is totally out of place in pharmaceuticals.
But if there is a trend towards salary-based pay structures, not everyone is prepared to contribute to it. The swing against commission incentives may have gone too far, warns Ken Reoch, sales director at Tack International, which also advises companies on salesforce remuneration. 'There's been a bit of a knee-jerk reaction,' he says. 'There's no question about it, extra money will bring extra effort. And, come what may, performance is crucial. If you ain't selling, you can't afford to pay ... I wouldn't be surprised to see commission coming back in some controlled form.' Anyway, companies like Allied Dunbar and Legal & General are sticking to their long-standing practice of employing sales personnel on commission only.
They argue that it is the purest form of performance-related pay. A few are venturing even further down the commission-only road. At Dudley Stationery, for example, six of the 45 salesmen are employed on a commission-only basis, even paying their own expenses. This approach, says sales director Martin Guntrip, encourages them to become 'total business managers'. They know that if they lose an account they lose a lot of money, so relationship building and service remain paramount. But the incentive to sell is strong. Some of these salesmen earn more than members of the board. 'We identify a lot with the Deming approach to paying teams,' says Guntrip. 'But we still believe that paying someone by results focuses the mind.' There are good reasons to rethink the salesman's role, and to reconfigure incentives beyond 'closing that sale'. But most selling is still about financial motivation. And those who choose to ignore this fact may do so at their peril.