Monday, August 27, 2012

Commissions may not increase profits

I was reading recently on some research done on the culture of giving commissions for sales and it seems that many big companies are increasingly reducing such culture because they realised that commissions do not meet their main objective.

The fact is that commissions will definitely increase revenue, but it does not always increase your profit. Many reasons were suggested but personally, I believe that it is because sales people who made the sales are not accountable to the execution of the sales. For e.g., if a salesperson made a sale for some kind of service provided by the company, what will happen is that the sales will make a sale, earn their commission, and hand it over to the poor execution team who may be bogged down with unrealistic expectations of the service to be rendered. Result? The salesperson earns the big fat commission and there is high turnover for the execution team because of the "promises" made by the pre-sales team.

There has been a trend now for big companies to do away with this commission scheme because they recognise that commissions do not always increase their net profit, which is the focus of any business operations. Apparently Microchip, a US public company, has adopted this no commission scheme and as a result, revenue increased, cost of sales remain constant, and attrition dropped. They adopted a 90% base salary, 10% corporate performance scheme for anyone who is not an hourly worker.

This works for them, and will most probably work for any other company because this makes the sales people accountable to what they have promised the customers. In the end, if they promise the sky and the company loses money, everyone will be affected. The responsibility is now to the team (pre-sales, sales and execution teams) to deliver, and this has resulted in increase of profits for the company.

This is nothing new as Microchip has been doing it for 10 years. Pity other companies are not following such practices. I guess they do not recognise that happy staff equates to more profits for the company. Pity...

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