100% Commissioned sales are killing radio.
Now, before you get all in a huff saying this guy doesn’t know what he’s talking about: I’ve been a major market VP/GM of a multiple station cluster where I managed the division’s growth to the very top of the market; I’ve been a major market program director having built several legacy stations and I’ve been the top billing sales executive at my station (after having not been given one account to start) - so I do know something about what I’m talking about.
Status Quo
Straight commission plans merely reward the content sales person to maintain the status quo. If you have a group of seasoned, experienced salespeople, each of whom is making a good income on a 100% commission compensation plan you may already know this. The problem is getting them to promote new products or seek a lot more new customers. That’s because they’re content to stay within their comfort zones of established customers, extraordinary income and familiar products.
This contentment is more typical than most of us admit. Many Sales Managers and principals continue to strive under the myth that sales people are forever motivated to sell ever larger quantities. And we attribute much of that motivation to the 100% commission compensation plan. Unfortunately, straight commission plans rarely motivate an established sales force to sell more.
Inheritance
The culprit, in addition to our lack of management strategy, is the straight commission programs that we inherited from our predecessors. Pay a person 100% commission, and that person tends to think of himself as independent - an entrepreneur who runs his own business. Your direction is just a minor irritant to him. His real direction is to do that which brings him his comfortable commission checks.
There was a time when straight commission programs made a lot of sense. When you didn't care what your sales force sold, as long as they sold something, then straight commission programs were appropriate. But in today's world, what you sell is important.
Directability
Our 100% commission plans also generate certain other additional problems. There is the issue of "directability" for example. "Directability" is that characteristic of a sales force such that, when you give them a direction, they can be reliably counted on to follow it.
We, of course, expect “directability” in every other employee. Imagine a company driver, for example, who, when you gave a direction to go to an address for a pickup nodded his head "yes," and then totally ignored your direction! I'm not sure that he would be around for long. Yet, we routinely allow our salespeople to ignore our direction. We have a process that we expect of the sales force - like calling on new and better customers, for example - and yet a significant number of our salespeople can nod yes at the sales meeting, and then go off and ignore our direction.
Any system can be gamed
Every compensation structure can be gamed. And that has its unintended consequences. Pay people a percentage above a target and you encourage a saw tooth pattern – there’s a pressure for sales people to undersell one month and save up the sales for the next month. It makes more sense to be 25% under target one month and 15% over target the next month rather than being 5% under target each month. You can fix this of course - you can play around with the thresholds, add ratchets and fiddle around with commission debt – but the compensation structure gets increasingly complex.
Strategic Importance
There are probably customers that you want your salespeople to focus on that are strategically important to you, to the exclusion of other customers. You may have target accounts, high-potential segments or customers to whom you want to sell more. Straight commission programs, of course, reward the salesperson for selling anything to anyone. So, if there are customers you want to more deeply penetrate, your 100% pay plan will be counterproductive. It rewards the sales person to sell more of whatever is easiest to sell.
IT System Upgrades
Straight commission is a vestige of days gone by. Much of the reason for that has to do with the sophistication of your IT system. There was a time when the only measurements all you could easily create were measurements of sales and gross profits.
It made sense, then, to use those measurements of sales and gross profits as a means of rewarding a salesperson. However, today's information systems are far more sophisticated, allowing the astute manager the option to measure sales behavior and the entire sales process much more finely than just sales and gross profits.
A zero sum game
Sales are no longer a zero sum game. Oversimplifying, in any month there are a finite number of leads we can contact; a fixed amount of money to be made. One sales person’s gain is another sales person’s loss with limited inventory. Imagine you could construct a sales robot, programmed solely by the rules in any sales structure. How would it behave? It would steal deals off other sales people, sell customers campaigns they didn't need, argue with its boss over its commission and backstab its colleagues. Any of this sound familiar?
The Win-Win Myth
Commission-only sales staff seems like a win-win situation -- the company gets to put more salespeople on the street without paying base salaries -- this approach can easily backfire and bog down the overall sales effort. Contrary to the idea that commission-only sales representatives are free, since they are only paid on what they sell, there are two huge costs of using such a sales force:
The hiring, training, and supervision of these workers can overwhelm the management team
Independent sales representatives are given little incentive to provide customer service beyond the sale
Training
Because a commission-only staff is not compensated for time spent on product training, most sales representatives working under this model consider it a burden. Such resistance makes it impossible to properly instruct representatives on the features and intricacies of a complex media campaigns. Paying sales representatives for training would do little to stem the high rate of attrition of commission-only personnel, and managers would still find themselves constantly teaching new staff. In addition to the overwhelming training effort, radio sales requires a higher level of continuing customer service, and since a commission-only compensation plan provides no incentives for providing ongoing support or even maintaining the company reputation after the sale is complete, this model often results in deteriorating customer support.
The wait to get paid
Most people either do not have the patience or simply cannot afford to wait three to six months or longer to complete a campaign sale and earn a commission as is required to form a new partnership with a client. In addition to the requirement that these staffers have the financial means to support themselves for several months, a long sales cycle dramatically increases the difficulty of maintaining their interest and motivation. As weeks and months go by without a commission payment, the natural tendency of people is to give up and find a more reliable source of income..
Stations in a cluster become competitors
Here is a common scenario that occurs among radio stations in the same cluster that have separate sales teams. Two stations (or more) will be pitching for the same piece of business and working against each other as competitors not partners. For example, in a cluster I worked with, sales reps from two of the radio stations that our company owned were each attempting to win the client’s entire $60,000 budget for a large annual community event with a wide demographic appeal.
Each rep pitched for the entire $60,000 budget. The client wanted to see what other “value added” each station would offer so they played each salesperson against each other. Both reps enthusiastically played the game as neither one wanted the other to get any of the business. Why?
Each rep wanted the full commission on the larger full amount. Neither wanted to share; each rep would receive the entire commission available if the client spent the entire amount on their radio station – and only half if the budget was split. Although it was definitely to the client’s advantage to have both major stations promoting the event (as they would have reached twice as many people than with either station alone), the system of 100% commission worked to effectively dilute the success of the campaign. Had both stations worked together, they would have been able to present an extremely valuable campaign, reaching a much larger and wider audience with an effective frequency, providing much more value to client and helping insure the cluster’s stations would be asked to repeat the campaign in future years.
Loss of possible upside
The other possibility that gets lost in this set-up is the potential for the cluster to work towards increasing the total budget for the campaign. If the two stations in the previous example would have combined to present a much more expanded campaign, the client might have increased the budget for the event as they would have recognized the tremendous value the cluster offered.
Commission in this case works against the company’s interests: the client receives reduced value for their investment (as the number of potential customers for the event is halved) and the opportunity for an even larger client investment was lost.
Fear doesn’t help
It turns out that fear is not a good motivator after all. Sales people have mortgages to pay, kids to feed and bills to settle, just like the rest of us. Would the anxiety of not knowing whether you'd be able to eat at the end of the month help you cope better? So why would it help sales people sell better?
Volume is a prime consideration
Commissioned sales reps receive the same commission whether a spot sells at $50 or $100 CPP. If the sales person sells inventory at the lower CPP, there is considerably less inventory left to sell at the higher rate, making it even more difficult to reach budgets. An order for $10,000 might take 100 units or 200 units of inventory. To the commissioned salesperson, it doesn’t matter. I have seen salespeople get into a fist fight with each other because they were arguing over who gets to sell the last remaining inventory. This is in spite of the fact that much of the station’s inventory had been sold earlier at a greatly reduced rate. It’s like the guy who said he got drunk with just one beer...his 10th!
Pyrrhic victory
Chapter 2 A Pyrrhic victory is one that occurs where you win a battle but your resources become extremely diminished in the process. Continuing to win in this manner will deplete your reserves to the point where you haven’t enough to win another battle and you end up losing the war. Although it is most closely associated with a military battle, the term is used by analogy in fields such as business, politics, law, literature, and sports to describe any similar struggle which is ruinous for the victor.
In radio, you continue to gain sales transactions benefiting the sales executive, and the station, but the results delivered to your poorly targeted clients when wanting to make more money can be mediocre - enough so as to slowly deplete your reputation as a media with high value. Continuing to add these transactional “victories” will leave you with fewer real client successes, resulting in fewer client testimonials, reducing the number of predisposed new accounts to call on and eventually restrict your capacity to grow revenues past inflationary values.
Commissions favor picking the low-hanging fruit
Paying our salespeople in commissions - a manner that as we have seen, encourages harvesting the low hanging fruit. Some stations have made all the news recently by using sliding scales of commissions (based on inventory used or price return per unit) are employing short term bad-aids. They’re like an ugly person dressed up in a new suit – they’re still ugly. They don’t work for the long run as they are still internally focused rather than customer focused.
Change: What’s stopping us?
Fearing Change
We have been successful with our current model for decades the thinking goes – so why should we change now when the result could be that we do not make our budgets and quotas? Strategy guru Gary Hamel has dryly noted that strategy appears “easy” only if you copy someone else’s. But copying someone else’s strategy is potentially the riskiest strategy of all. Despite all our affection for concepts like innovation and entrepreneurship, however, we are often strikingly risk averse, even when we’re dissatisfied with the status quo. We fear the negative consequences of risk, even as we ignore the even more negative consequences of staying the course. We need to reassess risk and then take a prudent risk on risk.
Understanding cognitive biases
Following are some of the more common cognitive biases on why we continue with 100% commission and rule out the possibility of a better system.
Selective search for evidence. We tend to be willing to gather facts that support certain conclusions but disregard other facts that support different conclusions.
Premature termination of search for evidence – We tend to accept the first alternative that looks like it might work. The first alternative is usually the system that has been passed on to us (100% commission) or a minor alteration of the same.
Inertia – Unwillingness to change thought patterns that we have used in the past in the face of new circumstances.
Selective perception – We actively screen-out information that we do not think is important.
Wishful thinking or optimism bias – We tend to want to see things in a positive light and this can distort our perception and thinking.
Choice-supportive bias occurs when we distort our memories of chosen and rejected options to make the chosen options seem more attractive.
Recentcy – We tend to place more attention on more recent information and either ignore or forget more distant information.
Repetition bias – A willingness to believe what we have been told most often and by the greatest number of different of sources.
Anchoring and adjustment – Decisions are unduly influenced by initial information that shapes our view of subsequent information.
Group think – Peer pressure to conform to the opinions held by the group.
Source credibility bias – We reject something if we have a bias against the person, organization, or group to which the person belongs: We are inclined to accept a statement by someone we like.
Incremental decision making and escalating commitment – We look at a decision as a small step in a process and this tends to perpetuate a series of similar decisions.
Attribution asymmetry – We tend to attribute our success to our abilities and talents, but we attribute our failures to bad luck and external factors. We attribute other's success to good luck, and their failures to their mistakes.
Role fulfillment (Self Fulfilling Prophecy) – We conform to the decision making expectations that others have of someone in our position.
Underestimating uncertainty and the illusion of control – We tend to underestimate future uncertainty because we tend to believe we have more control over events than we really do. We believe we have control to minimize potential problems in our decisions.
So you can see what you are up against in your mind and with your associates in attempting to develop a better system of compensation.
Delayed gratification
If someone offers you a choice between receiving $100 one month from now and $120 two months from now, what would you do? Studies have found most people will wait for the larger sum of money.
Now, suppose someone offered you $100 right now or $120 one month from now, which would you choose? In this case, studies have shown most people will choose the $100 right now. Rationally, the two choices appear the same; you get a benefit from waiting one month longer. In practice they don’t feel the same because the money becomes available immediately; psychologists say the automatic sense is engaged. In the first choice, waiting the extra month made sense in the called the reflective sense.
Most of us would prefer the reflective sense choices in life because of the long term benefits that accrue from making these decisions. But what can we do to move toward making choices and decisions this way? Get rid of straight commission.
How many times have we taken call-in accounts and aired their poorly planned campaigns with the belief that the schedule and creative wouldn’t work really well for the client (don’t be embarrassed, we have all done it as salespeople)? How many times have we sold campaigns that were insufficiently weighted or over weighted to be effective or efficient? Our reflective sense realizes it would be better for both the client and ourselves to do the due diligence required to design and launch a successful campaign but our automatic response tells us we’d rather have the order (with its resulting commission or budget achievement) right now. We know with our reflective sense that a campaign that works well for our clients will yield us a long term customer and that an ineffective campaign will bring us long term pain: the client will not become a repeat customer and will tell everyone who will listen that radio doesn’t work.
Budget and Quota Requirements
It is important to have budgets and quotas for many reasons: finance people to do their forecasting, planning for staff levels and purchasing to name just a few. The problem is budgets and quotas force salespeople to do whatever it takes to meet them - so they sometimes execute questionable tactics in order to “take whatever we can get”.
What you know about motivation is wrong
According to Dr. Daniel H. Pink in his book “Drive: The Surprising Truth About What Motivates Us,” forget everything you thought you knew about how to motivate people--at work, at school, at home.
It's wrong.
As Daniel H. Pink explains, the secret to high performance and satisfaction in today's world is the deeply human need to direct our own lives, to learn and create new things, and to do better by ourselves and our world.
The revelations he shares were generated by a five-year research project that involved thousands of test groups and individuals as well as dozens of research associates. Also drawing upon the abundance of research by several behavioral scientists and their four decades of scientific research on human motivation, Dr. Pink exposes the mismatch between what science knows and what the radio business does - and how that affects every aspect of our lives.
Today, you just can’t motivate people from outside. Motivation is internal. He demonstrates that while the old-fashioned “carrot-and-stick” approach worked successfully in the 20th century, it's precisely the wrong way to motivate people for today's challenges. In Drive, he reveals the three elements of true motivation:
Autonomy - the desire to direct our own lives
Mastery - the urge to get better and better at something that matters
Purpose - the yearning to do what we do in the service of something larger than ourselves
The key point is that people respond to more than just money in getting their work done. And the more you need someone to use all their resources, the more money actually becomes a hurdle to success rather than an aid . . . by narrowing focus too much. More about this in a moment.
Motivated People aren’t born
Pink has many other relevant insights. There is a distinction about what truly motivated people behavior is...and isn't:
It is made, not born
almost always outperforms “carrot and stick” people in the long run
does not disdain money or recognition
is a renewable resource
promotes greater physical and mental well-being
is self-directed
devoted to becoming better and better at something that matters
connects the quest for excellence with a larger picture
In stunning contrast, carrot-and-stick people are “fueled more by extrinsic desires than intrinsic ones. It concerns itself less with the inherent satisfaction of an activity and more with the external rewards to which that activity leads”.
According to Pink, begin with a carrot-and-stick mindset and mastery is impossible. Begin with truly motivated people and it can be inevitable.
The rich get richer
As well documented as Dr. Pink’s points are, don't expect stations to quickly switch over to encouraging autonomy, mastery, and purpose instead of paying big commissions and bonuses. Carrots and sticks involving money are in place because they pay well for those on the receiving end . . . not because they reward shareholders well.
Attribution Error
The idea that sales people are different to the rest of us is based on what psychologists call a fundamental attribution error. We tend to explain other people’s behaviors differently to our own. For example, I was late this morning because my alarm didn’t go off. But you were late because you’re lazy. In the first case, I blame the situation. In the second, I blame your personality. Similarly, I come to work because I love what I do. But you – and sales people – come to work because of the money. I am motivated by interesting work, the chance to make a difference and recognition by my peers. But you are motivated by cash.
Of course, some sales people do their jobs not because they enjoy them, but purely for the cash. Those people will, over time, leave. And that will be a good thing for radio
The laser-focus on money
This problem can occur where company executives have an opportunity to gain wealth. They get so focused on the money that they don't see anything else.
In a very famous experiment on this subject, Daniel Simons and Christopher Chabris conducted a study at the University of Illinois that had shocking results. The subjects were asked to watch video of a basketball game, and, were tasked with one thing; counting the number of passes made by the players in white shirts only.
At one point on the video, someone in a gorilla suit walked through the group playing the game, and then stood in the middle of the screen before walking off again. Over half of the subjects watching MISSED the gorilla!
Our ability to notice things consciously is very, very limited. When the subjects had their attention riveted on certain things, it actually deleted those things that didn't match, even when they were right in front of their face. The problem with this focus is our attention acts as a filter...a powerful filter! It can, and does, direct all resources to specific tasks and away from others and for sales people, they make a lot of mistakes that they wouldn't if little money were involved.
Conclusion
All of this leads us to an obvious conclusion. If you are currently paying your sales force on a 100% commission plan, it is time to examine some alternatives.
Solutions for Growth
Companies get themselves into trouble all the time by being too clever with their incentives. Stock options did reward leaders for getting the price of the stock up—it’s just that it was often for a short period, and was accomplished by distorting earnings.
Be careful what you pay for—you might just get it
Jeffrey Pfeffer - the Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University
A new approach
Several businesses are rethinking the way they compensate their superstars. The approach is like that of the New England Patriots; they concluded it is the franchise, the massive machine that earns the profits, not the individual. Similar thinking exists in the Oakland A’s baseball team where statistics showed it was the simple ability of players to get on base that propelled their success in making the playoffs so many years with one of the lowest payrolls in baseball, not the sporadic larger-than-life performance of any superstar. Even some of the large investment banks are thinking that it is their inherent strength, not the extraordinary talent of their traders and financiers that generate those huge sums of profit.
Ideal Profile
The perfect candidate for radio sales would have the following characteristics.
Persuasiveness. They tend to be adept at conveying information and influencing others. They are comfortable communicating in a straightforward way to convince a client of the benefits of the services they are providing. They also demonstrate the urge to complete tasks quickly and show a high tolerance for risk and thus are apt to aggressively pursue the sale.
Interpersonal. They tend to be sociable and gregarious, with a high ability to meet new people and develop lasting relationships with a wide network of individuals. This, coupled with their persuasive inclination, assist them in gaining access to, and building confidence with, key decision makers. They are also adept at maintaining contact with clients over long periods of time, allowing them to develop more leads and stay in tune with changes in the industry.
Problem Solving/Decision Making. They exhibit a concrete, rapid decision-making style. Rather than generating innovative suggestions, they prefer solutions that had proven effectiveness. Therefore, they tend to come up with solutions based on knowledge gleaned from their personal networks and interactions with clients.
Personal Organization/Time Management. They exhibit strong levels of self-discipline indicating that they are skilled at managing time and staying organized. They prefer to operate independently and with little supervision, and tended to make decisions quickly and move on to the next task without second-guessing past decisions.
We need complex thinkers
Removing commissions allows sales people to behave in more complex ways. Sure, we want sales people to sell more stuff, but only if it's right for the customer. As a business, do we prefer to sell $100 of inventory today or $200 tomorrow? It depends - on the likelihood of tomorrow's sale falling through, on whether we'll make that sale anyway, on many other things. We need our sales people to weigh up complicated situations and make decisions based on their judgment as to what the right thing to do is. Any sales commission’s scheme we could come up with would contradict these complexities.
Sharing
Without commissions, sales people share more. If Alice is off sick then Bob will cover for him. If Bob is dealing with a customer that Alice would be able to help better, he’ll hand him over to her. If Alice’s product knowledge needs improving, she can spend some time away from selling. None of those things happen often with commissions.
By removing the simplest, crudest and least effective motivational tool of money, you’ll force your managers to find more powerful, subtle and productive techniques to motivate sales people. Rather than relying on carrots (sell more and you can buy that new car) and sticks (don’t sell enough and you won’t be able to feed your kids), you are compelled to make our sales people’s work more interesting, to set better goals, to encourage more teamwork.
Management overhead
You no longer have to spend so much time setting targets (sure, we still set targets, but it’s not so important we get them right); we spend less time deciding who worked on which deal and where the commission should go; our managers can spend less time fiddling with spreadsheets and more time making their teams hum.
Wharton’s study on the power of purpose
Another study that examined whether infusing a task with purpose can motivate high performance, conducted by The Wharton School, University of Pennsylvania’s Adam Grant, involved the call center at a university fundraising organization. Grant obtained permission to talk to the folks working at the call center — and then randomly assigned employees to one of three groups.
One group of these employees read stories from other employees describing what they perceived were the personal benefits of the job, including financial benefits and the development of skills and knowledge (Personal Benefit condition).
Another set of employees read stories from the beneficiaries of the fundraising organization, who described how the scholarships they obtained from the organization had a positive impact on their lives (Task Significance condition).
Finally, there was a third group of employees that did not read any stories (Control condition).
In addition, the employees were told not to talk about or share what they had read with any other callers. The researcher was able to obtain the number of pledges earned as well as the amount of donation money obtained by the callers both one week prior to the study and one month afterward. So what happened?
The results were amazing. Employees in both the Personal Benefit and Control groups secured the same number of pledges and raised the same amount of money as they had before the intervention.
But people in the Task Significance Group, the ones who read about what their work accomplished and how it affected the world, earned more than twice the number of weekly pledges (from an average of 9 to an average of 23) and more than twice the amount of weekly donation money (from an average of $1,288 to an average of $3,130). This perhaps is even more confirmation of the power of the purpose motive.
The key to success is the people
Before completing this discussion of compensation, this point needs to be stressed: As important as money is, and as potentially valuable or inhibiting a compensation plan can be, the key to sales success still remains whether the individual possesses the basic dynamics or motivations and whether he or she has the other requirements necessary to sell successfully in a specific sales job. It is that inner motivation that drives the salesperson to the next prospect and propels him or her out the door the next morning. Money helps the successful salesperson keeps the score. But it is the inner motivation, the desire to get “yes” and the emotional gratifications that closing brings, which is the force behind the real salesperson's performance
Your compensation system should:
Increase stations’ sales beyond the market’s organic growth – break out of the commodity trap.
Achieve better results for clients.
Develop a higher incidence of repeat business.
Reduce overall cost of sales.
Develop team work among sales personnel.
To ensure a high probability of success, you need:
strategic recruitment where the right person is selected to fill the right job according to organizational needs
training and development programs on an on-going basis to every level of employees designed for improving their performance
implementation of a performance management system to identify high-performing employees for the purpose of giving rewards befitting their performance, work quality and output
giving recognition and implementing a fair rewards system to retain quality employees
Consider then implementing the following:
reorganize compensation geared to the particular dynamics of the sales team
develop an incentive program built on group, in addition to individual, productivity
divide sales responsibilities between those capable of new business acquisition and those more suited to maintenance and expansion of existing accounts
reassign salespeople to clients with whom the chemistry would be more effective
