Compensating sales people in software service firms

By | February 13, 2013

Salespeople are most often compensated either fully or partially with commission. The conventional wisdom is that sales people need incentives to sell and should be kept hungry through at-risk compensation packages. I think this is a risky way for innovation service firms to pay the people who are selling their services.

Atomic doesn’t use a commission approach to compensation for the people who sell our services. But in the spirit of regularly challenging ourselves on closely held beliefs and business practices, we recently considered what using an at-risk model of compensation for our sales people would mean. Below I list some of the downsides I see with commissions. At the end I describe how we handle sales at Atomic Object.

Downsides to commission sales

Limited inventory

Service firms have a clear limit on how much they can sell. Once the capacity to provide service is committed, there’s nothing more that can be sold for a given time period. If a salesperson’s compensation is tied to commission, this puts a hard constraint on their income regardless of their success in selling. Selling more isn’t possible, and this isn’t fair to the salesperson.

Commissions no doubt work better for software product firms that can sell any number of licenses or copies of a product. With a digital product, there’s no limit to the product that can be sold. That’s not true when the product being sold is the skill and time of the people in the firm.

Maker happiness

It is easier to sell development time than it is to sell projects that are interesting, challenging, and satisfying to our highly skilled and committed employees. In the long-term, our success depends on recruiting and retaining the best makers (our generic term for those who create value for our clients).

Honest budgets

It would be easier to sell projects if we took an overly optimistic (i.e. unrealistic) view of their total cost. This would push the unpleasant discussion on realistic budget levels off to another day and to the makers in general and project leads, in specific.

Small clients

The time and effort in upfront work for a small client is often as much as for a large client, with size measured by revenue from the project. A rational salesperson compensated mostly on sales would favor larger clients, even when a project from a small client might fill a capacity hole and keep makers busy.

Long-term client relationships

A small project for a client that may provide a large amount of work in the future may be valued differently by a salesperson compensated on the immediate value of a sale than a salesperson thinking of the lifetime value of a client.

Worthy but small clients

Clients that may not be monetarily valuable to the company, but are judged worthy in some other dimension (mission, community, long-term potential, etc) may not get the attention they deserve.

Marketing vs sales

Though they are often on the frontline and in a perfect position to market the company, salespeople who receive commission have no real incentive to do so long-term. They benefit most from focusing on short-term sales that directly affect their bottom-line.

Idle capacity

Salespeople compensated only on selling will have no concern for the ultimate goal of a service company, namely, to keep their makers busy. This means they are de-coupled from the ultimate goal of company profitability.

Sharing opportunities

Unless specific rules for compensation address sharing, salespeople would rationally prefer to horde sales leads and handle them individually, even when the odds of a successful sale are increased by involving more than one person.

Maker help

Involving a maker is often very helpful in closing a sale. The time of makers must be carefully balanced between billable projects, sales, and everything else. A salesperson compensated only on sales, and not company profitability, would have no incentive to use a maker’s time wisely.

Sales at my company

Atomic Object has four people who “sell”. Our system for selling involves:

  1. taking inquiries from people with software development needs
  2. determining whether there’s a good match between their need and our capacity and abilities
  3. determining a budget and timeline
  4. selecting the appropriate team
  5. kicking off the project

We think about this as the upfront work of each project. We often work together on sales opportunities. When those four people are not selling, they’re checking in with teams and projects, working on marketing, cultivating client relationships, recruiting, contributing to client projects, managing people and processes, and thinking strategically. Direct time on sales takes approximately 20-25% of our time. (That’s theoretically equivalent to one full-time sales person supporting 35 or so makers. In practice, I don’t believe a single human could last more than a few months doing this work alone.)

The compensation for the four people who handle the “upfront” project work for Atomic is an hourly wage approximately 20-30% higher than our senior maker salaries. To me that differential acknowledges the difficulty and stress of our upfront role, and the unusual blend of skills it requires.

The upfront team has no compensation that is determined directly by their success or failure in selling. However, each member of the upfront team has a significant equity stake in the company, so keeping the company profitable (i.e. busy) results in nice quarterly distributions.

We count on the individual judgments of the upfront team to make the right short-term decisions between clients relationships, opportunities, marketing, projects, maker happiness, and strategic initiatives to create long-term value. Their equity stakes align well with this.

No one way

I know firms like Atomic that are successful with a commission model. I can readily imagine firms that would fail with something like our model. As with most complex human endeavors, success or failure ultimately rests on the individuals involved.

If you’re a founder and you don’t like doing sales, or you’re ok with sales but want to get back into technical work, you might decide to hire a salesperson. I’d suggest looking first to your current employees regardless of their current role. The traits of a successful salesperson might surprise you.

If you do need to go outside, you should think very carefully about the drawbacks of a commission model. It might be hard to hire someone who identifies as a salesperson if you don’t offer commission. But you can also view this difficulty as a filter for selecting someone who will take a long-term view of your company’s success, and gain satisfaction from their work beyond their paycheck.

It’s clear what works best for us here at Atomic but I’d love to hear how others handle this problem.

Carl Erickson (70 Posts)

Carl is the president and cofounder of Atomic Object, a software product development company with offices in Grand Rapids, Detroit, and Ann Arbor. Learn more about Carl.


 


2 Comments

Matthew Chatlin on March 1, 2013 at 12:03 pm.

Great piece I agree with so much you said above. Especially the marketing vs sales section which applies to even a gambling company.

Some brief thoughts some of which echoe your own:

I never want my customers to feel like they are in a “boiler room” situation. I think commission driven salary in its nature promotes this unwanted situation.

When hiring someone for sales if they don’t sell you can always fire them.

Commissions do not incentivize they promote benchmarks.

Commissions bring in the wrong kind of inhouse competition.

Enjoy your thoughts I look forward to more.

Carl Erickson on March 1, 2013 at 4:08 pm.

Thanks for the comments, Matt. There’s a lot of ways of skinning this cat, and I’m sure commissions work in some cases, but I think it’s good to be aware of the potential trouble areas.