Can you imagine Michael Jordan taking a contract with the Bulls where he would only get paid if they won a championship?
Or how about an AI engineer signing a pure performance-based contract wherein they are paid only if their AI agents gain market traction?
Of course not.
However, there is one profession that is routinely requested to go to work for free.
Of course, I’m talking about sales.
How is it that the most important job in any company, the role that literally makes it possible to exist, is so routinely disrespected by would-be employers?
No one would ask an operations or finance person to work for free, but the salesperson is constantly told they can “eat what they kill.”
I’m sorry, but you have to pay the salespeople.
A package that only rewards performance, simply doesn’t work for the following reasons:
Adverse Selection
55 years ago, an economist named George Akerlof at UC Berkeley studied the problem of lemons in the secondary car markets.
The rub of his research is this: buyers can’t trust sellers of used cars because the seller knows more about the car than the buyer. Only the seller knows about the time it stalled out on the freeway or how it overheats on long drives. So the rational thing for the buyer is to demand a better deal to compensate for the potential pitfalls that lurk under the hood.
These “information asymmetries" cause the market clearing price to artificially depress for all deals (even premium car sales).
In short, if you don’t know what you are looking at, it’s best to assume it’s an “average” deal to hedge against the chance of failure.
The same thing happens when you hire a salesperson.
To extend the example above, it’s helpful to think of the company as the “seller” and the salesperson as the “buyer” in this transaction. I know it feels upside down, but hang with me.
The salesperson needs a place to ply their trade. Their options are manifold.
Sure, they could sell for you, but they could also sell for your competitor or in a different, growing market. Or they could start their own company and exchange their bonus for the whole revenue stack.
The thing they choose to sell should make them the most money and then they “buy” that opportunity with their time.
However, how do they assess which opportunity is right for them? Just as the average car buyer is not a mechanic, so is the average sales person is not a product engineer. They can’t predictably determine if the company’s product has a market need so they have to compensate for this information asymmetry by demanding a higher price (i.e. salary) for their time.
Need another way to think about it?
What’s the salesperson's BATNA (Best Alternative To a Negotiated Agreement)? If they can’t do better than work for free, maybe they aren’t the talent you deserve.
I have heard folks looking for salespeople say, “If you are confident in your abilities, then you should be willing to be paid purely for performance.”
Again, considering the notion of adverse selection, what signal does a statement like that illicit to the salesperson?
What I hear is that the company doesn’t feel very confident in their product. Otherwise, they would invest in a proper sales team. Why would anybody want to work for someone who thinks so little of their company and service?
Again, Michael Jordan didn’t play for free. He wanted to win (and he did!) but he knew that the team that was as committed to winning as he was would pay the piper.
One of the most specious and recurring notions I hear from CEOs is the idea that they just need someone to open doors.
The idea has the quality of seeming true, because we all know people that are titans of their industry; folks with a deep rolodex of other influential people that will take their calls.
The company that seeks to growth hack their way to sales sees a pathway where they can ride the coattails of this executive, who will, in turn, open doors for the company that yields new revenue.
The problem with this story is that it forgets how the “opener” developed this network in the first place.
Trust is something that is built. The reason this person has a strong network is that they consistently placed other people’s interests above their own.
Do you think that person got to this point by selling their network to the highest bidder?
No, they would still need to determine if the solution would be good for their contacts by meeting with the them to determine the products’ merits and discourse with the buyers on their needs.
In short, there is no free lunch via quick referrals. All parties need to invest the time to determine fit.
The Profitable Returns of Lost Deals
A final point is that just because a deal is lost, doesn’t mean it’s without value. Each sales encounter is a chance to receive market research, feedback and improve your service or product.
In discussing the deal with my prospect, I learned a great deal about what it will take to win in this particular market. I gained intelligence about my competitor that won the deal. Most importantly, I built a relationship with my prospect.
Kasvaa developed these assets through the “lost deal.”
Would I have rather had a “win”? Duh! But that won’t stop me from making my shop better.
A performance-only compensation package says that all you care about is money. If you don’t care about listening to yet-to-be-closed prospects, then you will have little chance of ever converting them.
If you hire a salesperson who continually hits walls, maybe the market is trying to tell you something? You can probably tell if they are bringing their A-game. It’s possible the problem isn’t the jockey, but the horse.
Conclusion
The point of this article was to help us see why sales pay is not entirely different than other counterparts in the organization.
However, of course, performance-based compensation should be part of your strategy. I just don’t think it can be the whole picture.
I also understand that it’s easy to become jaded.
There are a lot of people and fractional sales firms that promise the world and can’t deliver.
In this environment, you need to de-risk in order to protect your investment.
However, the way to do that is to interview better, speak with references and run tests that can gate your investment.
It’s not an excuse to expect something for free.
Because if you do that, you’ll probably get what you pay for.
Best,
Stephen