The pros and cons of commission


commissionIn the car business, we are blessed to have both the owner and the salesperson dependent upon gross profit. Until, of course, gross profit for one is not gross profit for the other. Extensive reconditioning can put non-commissioned gross into the pocket of the owner while making the vehicle harder for the salesperson to actually sell. Packing the vehicle does this outright.

On both sides, there is a temptation to game the system. We don’t let the salesperson evaluate the value of a trade-in, because there is too much temptation to overvalue it. There are also temptations for the owner to abuse the system. A commissioned compensation plan is put in place to incentivize the salesperson to extract the maximum amount from the customer but problems constantly arise over fairness issues that don’t involve the customer.

In fact, nothing about sales commission is designed to enhance customer satisfaction. It is important to have measurement over customer satisfaction and control over regulatory compliance. These are things the salesperson is often not compensated for but pose a huge risk to the long-term profitability of the store. I recently sat in while a sales manager explained to the ownership that it shouldn’t matter that his customer satisfaction was 30th out of 33 stores. His loyalty numbers were in the middle of the pack, and that was all that counted.

Clearly, loyalty is a lagging indicator. A current drop in customer satisfaction impacts loyalty years down the line, but will usually have little or no immediate impact on short-term loyalty unless it impacts reputation management and/or social media efforts. Controls must be in place to assure the right activities are going on today to both maximize gross in the short and long run.

Today, a great deal of the sales process goes on before the salesperson ever meets the customer. Shoppers are spending many hours online with technological touchpoints before any human interaction. The store’s performance online greatly impacts both the quantity and quality of the salesperson’s opportunities. Some of the deals are little more than order taking, yet some are very difficult.

Often the salesperson feels as though they are in business for themselves. Compensation by commission fosters these feelings and beliefs. Those operating on commission will strive to succeed or get out, but getting them to achieve success within the parameters defined by the organization and regulatory constraints can be a huge management challenge. In short, commission sales in a complex selling environment provides little more than an illusion of management control through monetary incentive.

Money is not the only way to motivate. The extreme example is the front-desk staff at a hotel. Studies I conducted at J.D. Power & Associates showed a high degree of correlation between the guest’s satisfaction with the initial check-in process and their overall satisfaction with the entire stay. These people handle many transactions, but most of us would not call what they are doing selling and would probably not even think of giving them a commission. They are order takers, like the cashier at McDonald’s or the supermarket. What would be the point of incentivizing them if the customer is sold before they ever come into the store?

On close inspection, the auto sales process is creeping along in this direction. An increasing portion of it is taking place online. The impact of transparency is that margins are being standardized more than they are being compressed. The result is a diminished justification of commission as an effective tool for attracting the best negotiators and getting the most out of them.

The majority of vehicles are sold in competitive markets that are impacted by market transparency and are sold by stores who do care deeply about their future value. For many of them, negotiating skill remains the most pressing reason for continuing with commission. For those stores moving to a fixed price or leaving very little room for negotiations, there may actually be more management control from a salaried approach or one with very little reliance on commission as a percentage of total compensation. Money is not the only motivator for employees. In fact, intrinsic motivation often poses a stronger force than extrinsic motivators, like money.

My favourite story about the two general categories of motivation involves one man trying to pay another to row a boat in the rain.
“Would you do it for $50?”
“That’s a lot of rain.”
“How about $75”
“Kind of dangerous”
“How about $100”
“What’s in that boat anyway?”
“Medicine for sick kids on that island. We don’t have any other way to get it there in this storm and they may die without it.”
“Stop wasting time talking about money. Give me the oars.”

Most of us would react the same way. Often, our reliance on money as a motivator is in inverse proportion to the degree to which we feel we are making a positive difference in the world. Even with enough money at stake to change our own quality of life, doing something “just for the money” can leave a bit of a hollow feeling.

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