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From Management’s Point of View ~Thoughts on Sales Commission~

February 16, 2024

Many corporate leaders worry about salary structures in the United States, and I often hear about concerns over sales commissions in particular. I occasionally discuss this topic, but I’m never quite sure how clearly I have communicated, and my own thinking has remained somewhat vague. Accordingly, I decided to take this opportunity to organize my thoughts better.


It is certainly the case that salaries are one of the things in which employees are most interested. And especially in the US, many companies rely on commissions for their sales teams. Having gone to college and built my whole career here, I had always considered sales commission system natural. On the other hand, having now spent many years as a top manager, there is no doubt that my thinking on commission structures has changed over time.


Industries and market strategies that strongly require commissions

When contemplating commission structures, the first things to consider are: a) the characteristics of the industry or sector that one’s company is a part of, and b) what sort of market strategy is to be adopted. Sectors like insurance and real estate are good examples of areas where commission-reliant approaches should be taken. This is because the differences in the products sold are challenging to distinguish among competitors, and sales ability becomes a critical lifeline for such companies.


Meanwhile, companies like startups that are attempting to enter new markets are expected to grab a substantial market share in a short amount of time. Such entities, even if they are operating in the red, must assemble top-notch sales teams. The only way for high-risk startups to recruit first-class salespeople is to offer incentives like high commissions. When this type of strategy is employed, investors will be amenable to high personnel costs even if losses continue for several years.


For companies associated with the kinds of industries and market strategies described above, it will likely be necessary to provide high commissions in order to attract tough and grasping people who are focused on rapid results.


Cases where commission-reliant approaches need not be adopted

Conversely, some companies are not well-suited to the payment of high commissions. For example, in cases where markets are being pursued through product development and manufacturing, although it is still true that the sales team is out there selling, it should also be recognized that the creation of highly functional products with reliable quality is due to the teams in development and manufacturing. Furthermore, to analyze factors such as which products will do well in which markets and how they should be presented, business management and personnel departments will be needed to cover operational issues, the appropriate placement of staff, and the like. The ability to sell is one of many requirements to achieve high sales volume; substantial support is needed from other employees engaged in development, manufacturing, and corporate management. Assuming that the capabilities of staff across the various departments are equivalent, these other employees would presumably feel unfairly treated if only the salespeople received high salaries, and top management would not want to create such a conflicting emotion in the company. It should be remembered that the payment of excessive sales commissions can function negatively from the standpoint of the company as a whole.


A market leader in Japan can be an underdog in the US

For the most part, the clients of TOPC Potentia are market leaders in Japan or at least control significant market share there, but quite a few of them have low market share or name recognition in the United States. If a market leader with high name recognition in the Japanese domestic market were to announce that they were hiring in Japan, they would indeed receive applications from competent people all over the country. This is not the case in the US. There is no reason to suppose that talented salespeople would bother to apply to an unknown company with no market presence, where even one’s potential income level would be in doubt. Such people would probably choose to work at companies with high commissions, with good prospects of significant earnings. For a weak player, then, it can be very difficult to hire top sales talent.


Stepping back from a commission-reliant strategy: Positioning sales as just one aspect of performance

For most companies, it is fair to say that sales is not the only aspect that determines performance evaluations. In our own company, for instance, there are six axes along which employees are evaluated, consisting of technology, service, teamwork, ownership, time management, and business (sales) development. Compared with other departments, sales jobs would naturally be given more weight to business development. At the same time, the word “sales” encompasses the fact that some projects are more difficult than others, and there are factors besides sales performance that should go into evaluation. These include an understanding of and support for the company as a whole, as well as demonstrating ownership with respect to one’s work and team. Employees who can close deals are, of course, talented, and their evaluation will rise based on sales performance. However, if they are not contributing to the company in other ways, or if they are actively dragging down their colleagues, then they are certainly not satisfying the other performance measures. If commissions are the sole determinant of salary, then employees will be able to receive high remuneration while also flouting the company’s rules and culture.  Unless there are specific reasons to maintain top-flight salespeople on staff, it may make sense to consider sales performance as one of the various factors to be used in employee evaluation, adopting a more comprehensive system of awarding raises based on the sum of those factors. Even if it is only possible to employ second-rank sales staff, careful thought should be given as to whether sales are mainly the result of sales-focused activity, or if sales are actually being driven by product quality.  Then, decisions can be made in light of sustainability, as outlined below.


Considering sustainability

Compensation structures should clarify how much is to be paid for what reasons, and these structures cannot be maintained in the long term unless they accord with company culture.


An important element of employment is that the company culture aligns with the employees’ vision. Someone who has strong self-confidence and mainly just wants to make money would probably do best at a company with a generous commission structure. On the other hand, there are those who may not have perfect confidence in their sales ability but who can steadily build trust-based relationships and who can work in cooperation with development, manufacturing, and accounting teams to demonstrate their worth. Such a person would probably choose a company that aligns with their individual nature, even if commissions are set lower. They could be expected to do solid work and to stay with the company for a long time. It is extremely important, then, for the company’s vision and the employees’ vision to match up appropriately.


Also, with a commission-reliant structure, employee compensation will be high when the company’s sales are strong (and commissions are high), meaning that people will generally be happy and the mood at the company will be good. But, when sales (and commissions) go down, people’s motivation and loyalty can be expected to sink immediately. The greater the weight of commissions, and the shorter the cycle in which they are paid, the stronger this tendency will be. When a company is in a slump, strong-performing salespeople will often be seen leaving.


Although there may not be much of a choice when a short-term market penetration strategy is deployed, it may be best to avoid over-reliance on commissions in the compensation plan if sustainable corporate growth is desired.


In summary

Although sales commissions are widely used in US compensation structures, they are not necessarily suitable for all companies or types of business. In fact, even in the US, the number of companies that don’t utilize commissions is growing. Companies must make comprehensive determinations based on a number of factors, including:


  • The industry or sector in which they are positioned

  • What kind of market strategy is being adopted

  • Whether the company is currently a strong or weak player

  • The degree of alignment between the company’s vision and the employees’ vision

  • Whether evaluation axes other than sales are being employed

  • Whether the current compensation structure is in accordance with the company’s current state (whether it can be sustainably maintained)


One common misunderstanding here is the idea that limiting commissions will directly reduce salaries. Top management should be compensating employees in accordance with market rates. Even when there are issues with results, for example, when satisfactory amounts cannot currently be paid due to the shortfall in company performance, it is my belief that the company should be doing its best to pay compensation to staff as much as possible, rewarding them for their hard work. While there are differences among specific industries and entities, management would do well to consider that a sense of fairness will generally be promoted by avoiding over-emphasis on sales commissions, and this will lead to longer-term employment for staff in all departments, not just for salespeople.


These are my thoughts as I write this in January 2024, and it’s possible of course that they will change in the future. Just as the “common sense” held by nations, peoples, cultures, enterprises, and individuals tends to shift over time in the context of broader changes, compensation structures do not exist as constants and will continue to evolve. Accordingly, I believe that top management needs to constantly consider what policies are best for the company and for all of the company’s employees, never shying away from the effort needed to execute those policies.


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