This is the ninth in a number of articles serializing The Sales Force — Working With Reps by Charles Cohon, MANA’s president and CEO. The entire book may be found in the member area of MANA’s website.

“I’m swirling in the bowl,” thought Jim as he drove home that night.

“I spent a bunch of time with Harold working on distributor council issues, which means when Ernie goes through the salespeople’s call reports he’s going to see that for the last two months I’ve made the fewest sales calls of any Bigglie salesperson. Plus I just gave a presentation that our company president and new sales manager hated. Add to that the fact that I undoubtedly stepped on Brocaw’s toes when I made recommendations on compensation issues that are the sales manager’s responsibility. Buchanan probably associates me with Harold because of the work Harold and I did together and obviously has a problem facing people he has fired, so he is probably uncomfortable being around me. Oh, and to top it off, two of my largest customers have moved away so my numbers for the last two months have dropped off.”

Ordinarily Jim tried not to take problems home and he rarely brought up business at the dinner table. He told himself that he preferred to leave that stress at the office. A more impartial observer might have suggested that Jim found his wife Ruth’s position as a Fortune 500 VP of human resources a little intimidating, and felt the small-company problems that made up his day only would serve to underscore how much less than Ruth he had accomplished. That observer also might have noted that Jim’s reluctance deprived him of a superb resource, because Ruth Anderson was one of the smartest people Jim had ever met. In the past 10 years since they’d graduated from college, she’d thrived in corporate America, earned an MBA and obviously was on the fast track for further advancement. Now that Jim had hit bottom, however, he knew he must let her know that he’d put his job at risk. Dinner that night was emotional as Jim laid out the events of the past two months. He even gave Ruth a hard copy of the PowerPoint presentation he’d made to Buchanan and Brocaw.

Ruth wisely bypassed commenting on the strategic errors that had put Jim in this position, concentrating instead on helping her husband to evaluate his current situation. “Honey, your arguments are very strong and I think you are right. The problem is that you demolished the logic Buchanan used when he created the current sales force structure, and you did it in front of his new sales manager, so you are not going to be on Buchanan’s or Brocaw’s good side. As a matter of fact, there’s a quote in a book that all the managers in my department have been reading that says, ‘Many managers want things to change, but only if they need not themselves do very much very differently.’¹ What you are talking about doing is very rational and very forward-thinking, but that kind of change in a corporate culture would be very difficult to accomplish, even with the complete support of management. This may fall into the category of you were completely right, and as a result of being completely right, you are completely out of luck.”

Jim picked up the book and riffled through the pages, noting that Ruth had highlighted about 50 passages. “I’m done with that book now, honey,” Ruth said. “If you want to read it you can take your time.”

The next morning, just as Jim expected, he was called into Ernie’s office. “Jim, your numbers and call history are pretty sorry looking. I’m going to need a plan from you by the end of the week to show me how you are going to turn this around.”

Jim thought to himself, “I won’t turn anything around if I spend a week working on a sales plan,” but he only said, “I’ve got a full week of sales appointments already made — any chance I could get a little more time?”

“Jim, there is nothing more important to your continued employment than convincing me that you can turn this situation around. If I were you I would cancel those appointments and do an outstanding job on that report. Quite frankly, I can see how a guy with such poor numbers would have been pushing for salary instead of commission, but there isn’t going to be any free riding here — so get on it.”

Jim heard the words, which he translated to mean, “I have already decided to fire you, but I need to document that I gave you a reasonable chance to bring your numbers back up before I can let you go.” Jim cancelled his appointments, spent part of the week working on the report and the rest looking for a new job.

Even though he’d spent most of the week writing reports for Brocaw and polishing his résumé, Jim had found time to finish Ruth’s copy of Pfeffer’s book. Although it was not sales-specific, the book supported Jim’s position. He also spent a lot of time playing and replaying in his head the presentation he and Harold had made to Buchanan, wondering how it could have been made more convincing.

Jim thought some of Pfeffer’s points might have made his points more credible, but decided the biggest problem he faced selling his ideas to Buchanan was that probably no company president would accept in just one sitting a proposal to turn their company topsy-turvy. After all, Jim too had rejected Harold’s concepts the first time that Jim had heard them.

Enough time had passed that the points he’d tried to make with Buchanan should have started to sink in, thought Jim. If that were true, the time would be ripe for Jim to revisit the topic with Buchanan. Jim decided to write him an e-mail, cite some of Pfeffer’s points, and see if Buchanan could be swayed.

Dear David,

I realize that our last meeting did not go well and I take the blame for failing to make my arguments sufficiently convincing — but I still hope you will give them some consideration.

Many of the gaps in my logic are topics that are well covered in Jeffrey Pfeffer’s The Human Equation: Building Profits by Putting People First. While your son was attending Stanford he may even have attended classes held by this respected academic, who is the Thomas D. Dee Professor of Organizational Behavior at the Stanford Graduate School of Business.

It was Pfeffer’s book that made me realize that I’d asked for a complete transformation in management’s mindset overnight without considering the barriers to rapid management change.

In Pfeffer’s words, “It is often easier and substantially more seductive to manage something — a strategy — that is analyzable and can be reasonably readily changed, as contrasted with dealing with the day-to-day details of operations and implementation. Those problems are less glamorous, less interesting, but more importantly, much harder to solve.”

Problems that fall into the category of “less glamorous, less interesting (and)…much harder to solve” cannot be ignored simply because they are less attractive, says Pfeffer. “Managers are always well advised to solve the real problem — not the one they would prefer to solve or are able to solve.”

Solving the “real problem” requires us to accept an answer that takes us in a direction that intuition would not. Sir Arthur Conan Doyle, writing for Sherlock Holmes said it best: “When all of the other possibilities have been exhausted, whatever remains, no matter how farfetched, is the solution².” As hard as it is to accept, when all the salespeople’s sales numbers are part of a system, there is no statistical difference in the values of their contributions to sales. Different compensation for the same contribution is a proven recipe for disaster, and “all the other possibilities have been exhausted,” so the only remaining choice is salary.

Pfeffer identifies another fundamental flaw in incentive/commission systems that I had missed: “One occasionally hears that incentives or surveillance and control (or some combination of the two) can substitute for trust by affecting the environment in such a way that people do the right thing. But this view is naïve, for incentives and controls work only for behaviors that can be specified in advance.” The behaviors we need from a successful salesperson — reacting to and even anticipating customers’ needs — are ones we cannot specify in advance or realistically measure upon completion. Can we say George scored nine on being proactive but Sam only scored 7.5?

The book also points out that managers often give more priority to insuring that their courses of action are justifiable than that they are correct. A commission system legitimizes decisions about sales force compensation because it is tied to a reproducible number. A manager who instead makes compensation judgments based on knowledge that is tacit, implicit or understood, but that is not easily explained, takes a career gamble. Why risk a job-threatening confrontation with superiors over a decision that was clearly dictated by experience, but for which a documented rationale cannot be supplied?

As Pfeffer puts it: “…if expert knowledge has some component — probably a substantial component — of tacit knowledge, it will be impossible for those with the expertise to present the real basis of their judgments and decisions when called upon to do so. How can you describe to others insights and intuitions based on judgment and expertise? What is likely to occur is simply this: When those with expertise are called on to explain their decision processes or to account for their decisions, they are likely to rely not on the tacit knowledge and judgment, which cannot be articulated, but rather on those factors and evidence available and accessible to all.”

Sales figures are an example of information that can be made “available and accessible to all.” Assessments of a customer’s satisfaction, while more important, are qualitative. Does George rate 9.5 on anticipating customers’ needs and Sam 8.5? Who says so? Why do they say so? It is so much easier for managers to justify their decisions based on the last cell of a spreadsheet, even when those numbers lack statistical significance. Pfeffer calls that “a confusion between ‘math’ and ‘management.’”

A straight commission system also costs Bigglie more in salary than it probably would pay otherwise. Let’s take the example of an open sales position. Our candidate has living expenses that require he seek a $50,000 per year position. Instead, we offer him a job that has a commission range of $40,000 to $60,000.

With all of the outcomes from $40,000 to $60,000 equally likely, your brother the insurance actuary would call this actuarially equivalent to a $50,000 salary, but simple logic shows most applicants would choose a $50,000 salary over our variable offer. Suppose most applicants were willing risk takers and $40,000 to $60,000 in variable pay were preferable to a $50,000 salary. It would be easy enough for a person enjoying a $50,000 salary to convert it to a variable salary of $40,000 to $60,000. Just take $10,000 to Las Vegas and (ignoring the fact that roulette wheels are not exactly 50 percent red and 50 percent black) bet on red. Las Vegas gives people with fixed salaries the opportunity to convert to variable outcomes, but only a small percentage choose that option. To most people, $50,000 is more desirable than the $40,000 to $60,000 variable option.

This should not come as a surprise. Most people have monthly responsibilities to pay mortgages, rents, car loans, and credit card bills. Without a consistent paycheck, they run the risk of not being able to meet those commitments.

If our compensation offer is a percentage of sales even though fixed salary is more desirable to our applicant, there are just two ways this salesperson will accept our offer. The first possibility is that the salesperson will accept our $40,000 to $60,000 variable plan but will remain unsatisfied and continue to look for more desirable terms of employment elsewhere. The second is that we will have to increase the upside potential of the commission plan to the point where the salesperson views it as equal in value to a $50,000 salary. For some candidates, this might be $40,000 to $70,000 and for others $45,000 to $65,000.

In either case, Bigglie must expect that the privilege of maintaining a variable pay system will come at a cost. In the first case, we pay more recruiting costs as we hire employees who accept our offer but leave as soon as they find the job they really wanted. In the second, the variable wages we pay are actuarially higher than the salary the candidate demanded. For example, if we offer a range of $45,000 to $65,000 and all numbers are equally probable, we are paying the actuarial equivalent of $55,000. Because we were not willing to guarantee a $50,000 salary, Bigglie has put itself into a situation where actuarially it can expect to pay $5,000 more in wages than it would have otherwise.

Let’s look at a group of 10 such salespeople who are performing within a system. We vary their wages from $45,000 to $65,000 based on their sales. When we tie compensation to sales even though all the salespeople fall in a range where none of their results show a statistically significant difference in their quality of work, the only benefit Bigglie receives from a variable compensation system is the right to match our employees’ pay to our sales. When sales are low, we have the privilege of paying less salary to offset lower profits. What we are paying for, effectively, is low sales insurance — the right to offset a sales slump with lower wages. In this example, the actuarial cost per salesperson per year is $5,000. So here we are, a half billion-dollar company, buying low sales insurance from each of our salespeople, with the insurance premiums taking the form of salary ranges actuarially higher than the salary that otherwise would have been demanded.

Finally, from an ethical standpoint, tying compensation to sales implies that salespeople control sales outcomes. For salespeople within a system, statistics prove that to be wrong, so suggesting to our salespeople that their commissions are proportional to their efforts and effectiveness is at best misleading. How can we be successful if our relationship with each salesperson is based on a lie?

To be continued next month.

MANA welcomes your comments on this article. Write to us at [email protected].

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¹ Jeffrey Pfeffer, The Human Equation, Building Profits by Putting People First (Boston, MA: Harvard Business School Press, 1998).

² A. Conan Doyle, “The Sign of the Four,” Lippincott’s Magazine, Feb. 1890. Available online at Project Gutenberg, www.gutenberg.org.