“We want our salespeople to work as trusted advisors to our clients.”
The VP of sales who shared that idea has a noble vision, and he’s not alone. Building customer trust is inseparably connected to building shareholder value. Not surprisingly, there's great interest: searching the phrase “how to build customer trust” returned 3,890 results on Google. But the VP has a conflict: his sales team is “coin operated,” vernacular for “they earn commissions based on revenue.” Could that undermine the platform of trust that’s core to his strategy? After all, his customers don’t know his company’s sales commission plan, and it’s no secret that clients don't always benefit.
In the US, commission-based arrangements for sales forces come in many flavors and varieties. And they're widespread, according to Barry Trailer [1] of CSO Insights [2]. His company's research found that of companies responding to their 2008 sales compensation survey, 98% included variable pay as part of their compensation plans. I know from personal experience that a commission-earning salesperson walks a fine line as a Trusted Advisor, and there's an ethical morass on either side.
Variable pay by itself doesn’t destroy trust, but the opacity that commonly accompanies it does. The headlines we've read about AIG and Madoff remind us why. In The New York Times, Frank Rich wrote “The question in the aftermath of the Madoff calamity is this: why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson couldn’t be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham—whether it’s an outright fraud . . . or nominally legal, as is the case with the Wall Street Giants that have fallen this year.” And Republican Richard Shelby of the Senate Banking Committee, quoted in The Wall Street Journal (March 17), said of AIG's widely-condemned bonus payments “There’s been no accountability, no transparency to speak of. . . Whatever we’ve gotten, we’ve had to extract it piece by piece, little by little. There’s too much secrecy.”
Agreed. Secrecy stinks. But Madoff committed deception. AIG . . . didn’t. And in what way do these issues relate to an Account Executive who sells professional IT services to companies in the Midwest? Fair question. There is a connection. Customers think salespeople have something to hide—and that’s a trust breaker. In a March 2, 2009 issue, InformationWeek reported the results from their survey of 345 technology professionals. The participants were asked “if you could get vendors to start doing one thing, what would it be?” Thirty-four percent of the respondents indicated “being up front about how their products do and don’t meet customer requirements.” That was more than twice the percentage for any other response.
In our technology-rich world, it’s humbling to think that good old fashioned honesty exists at the top of the list of customer wants. If only we could easily give our customers what they’re begging for. But for a salesperson with money on the line, “being up front” presents a wide ethical strike zone. And companies use variable pay to influence a myriad of actions, which include the ethical decisions the sales force makes. (Specific ethical dilemmas salespeople face are discussed in an earlier CustomerThink article, "On My Honor As a Salesperson: Why Sales Ethics Matter" [3]) Similarly, in my selling past, there were many background situations I didn’t disclose, but they influenced the advice I offered. For brevity, I’ll list just four:
Service plan revenue generated 8% commissions
Selling direct to customers credited 40% more revenue toward achieving my sales quota over a sale through a channel partner
There was a quarterly bonus of $10,000 for achieving the quarterly revenue goal
Competitive displacements earned higher commission than installed account sales
In March, I decided to investigate this issue in more depth, and through LinkedIn I asked salespeople “Do you think prospective customers should know how much their salesperson might make in commissions and/or bonuses from their purchase transaction?” Although the number of responses received wasn’t large, they supported the idea that for salespeople, such transparency was not needed—with one notable product exception: sales of financial securities. A few nuanced views discussed the importance of disclosing to a customer how much a broker might make selling Security A versus Security B. But why draw a boundary around financial services? Shouldn’t customers of other products and services demand equal levels of transparency from their sales advisors?
Some companies believe so, and in the name of increasing shareholder value, they have adopted a progressive view for creating sales trust and transparency—and been rewarded for the effort. The Wall Street Journal reported on March 16th (Best Buy Confronts Newer Nemesis) that Best Buy CEO-designate Brian Dunn “opposed (Best Buy’s) 1989 decision to do away with commissioned sales in favor of salaried staff, which was widely opposed by sales workers who feared losing income. He now concedes it was the most important shift in company history, lowering worker costs, and changing the core model of electronics retailing. Best Buy expanded across the US, and Circuit City eventually followed by eliminating sales commissions.” To the victor go the spoils. Analysts believe Best Buy will capture half the business of now-defunct archrival Circuit City.
There’s more to that story than just sales commissions, but it’s worth pondering how—for a business as complex and dynamic as electronics retailing—elimination of sales commissions was granted such honored recognition. As one who eschewed buying from high-pressure Circuit City salespeople, I know the decision had as much to do with improving customer experiences as with lowering labor costs. According to Mr. Dunn, “we want our stores to morph into a series of experiences . . . to do that, you need to go where the rubber meets the road, the sales floor.” For Best Buy, eliminating sales commissions makes it easier to foster the transparency required for creating valuable customer relationships.
Outside of electronics retailing, improving customer experiences doesn’t mean eliminating variable pay, but it does mean looking at sales compensation differently. Are the right outcomes rewarded? Does rewarding revenue achievement alone work at cross purposes for maintaining excellence in customer experiences and building loyalty? Does increased transparency matter to customers? When it comes to trust, what changes would be most valued? If transparency is increased, what additional changes would cascade throughout the sales organization? Would those changes be positive for building shareholder value?
Best Buy, which now has a new major competitor in Wal-Mart, has the right perspective on trust, transparency and customer experience. I hope others will follow its example.