If you work in sales, a basic model for how you get paid is that for each new customer you bring in, you get to keep a percentage of the sale, i.e. a commission. So if your commission is 5%, and you sell $10,000 worth of goods, you get to keep $500. You might also get a base salary, probably commensurate with your experience, but if you make your career in sales, the commission is what drives you.
It’s a good model in that it aligns the incentives of the business with those of the salesperson. The business wants more customers, ideally very quickly, and the salesperson wants to make money quickly, so the business is happy to pay the commission because new customers are exactly what it wanted. Like I said, it’s a good model. Mostly!
There’s the Wells Fargo account fraud scandal
, where bankers literally created millions of fraudulent checking and savings accounts for Wells Fargo customers without their consent. They were bankers, of course, not salespeople, except, nevermind
In [Wells Fargo CEO] Kovacevich’s lingo, bank branches were “stores,” and bankers were “salespeople” whose job was to “cross-sell,” which meant getting “customers”—not “clients,” but “customers”—to buy as many products as possible. “It was his business model,” says a former Norwest executive. “It was a religion. It very much was the culture.”
I could stop there, but how can I possibly not include this gem:
In 1997, prior to Norwest’s merger with Wells Fargo, Kovacevich launched an initiative called “Going for Gr-Eight,” which meant getting the customer to buy eight products from the bank. The reason for eight? “It rhymes with GREAT!” he said.
Having existing customers purchase additional products from you is generally a good thing, so it makes sense that as a business, bankers’ incentives were aligned around selling more products to current customers. Except they forget to check that the customers consented to the purchase of those products. Toxic culture leads to bad outcomes for customers. Oops.
Tweaking the model
The Wells Fargo example is admittedly egregious, so let’s return to our basic sales model before it’s been corrupted beyond the point of redemption. You pay your salespeople a cut of each sale. Win win for both the business and the salesperson. Simple.
The first place I expect this system would fail would be in bringing in the wrong type of customer for the business. This can happen in obviously bad ways, where the seller promises things the business can’t deliver, thus leaving the business with an unhappy customer who can’t get value because the product doesn’t do what they expected it to do. Or it can happen in more subtle ways, where the salesperson sets expectations with the customer correctly, but the customer just isn’t a great fit for getting value from the business long term, so they’re much more likely to churn than a better fit customer. The usual remedy for this in the basic sales model is to introduce clawbacks, where if the customer churns before hitting a specific benchmark, the salesperson will lose their commission for that sale. This way, you only reward salespeople for bringing in customers who are going to generate revenue long term.
Tweaking the sales compensation model is how most business’s are going to continue to align the motivations of individual salespeople with the needs of the business. As Matt Roberge writes in The Sales Acceleration Formula
Whether you’re a CEO or a VP of sales, the sales compensation plan is probably the most powerful tool in your tool chest. In thinking back to the critical strategic shifts HubSpot made as a business, most of them were executed via changes to the sales compensation plan.
If you want customers on an annual contract, only pay commissions on annual contracts. If you want more customers to sign up for onboarding, pay a spiff (a spot bonus) for selling onboarding. If you need more focus at the top of the funnel bringing in new business, send the person who creates the most qualified opportunities on a post-COVID Disney Cruise.