This blog post is an update to “Restructuring your Sales Commission to Encourage teamwork in our Startup.” Please read that first to fully understand what is written below.
Why our Startup Got Rid of Sales Commissions
Our business has been growing organically and strong for the past year, with about a 7-10% month-over-month growth in monthly recurring revenue, $4M+ annual revenue in less than 2 years with $350k in funding, and more importantly, employee morale at an all-time high with customers raving about our service. While others have praised us for the company we’ve built (and I as the CEO am very proud of it), I let everyone know that it has been stressful, exhausting, and frustrating. Why? Because of all the difficult decisions you need to weigh while sacrificing certain ideals you’ve always dreamt of when building a company.
The most recent: do we create a sales commission structure. Quite a simple question, but when delving in more, is complex. If we create a sales commission structure, does it promote personal gains over team collaboration? Is it fair for one person to receive commission when others are helping the customer in their lifecycle (i.e. support giving customer support and developers resolving bugs)? How about all the days spent tracking all your closed deals at the end of month?
As you can tell, I’m clearly biased for a non-commission structure because I haven’t seen it work in a way that makes sense to me. For example, why do companies that have scaled with a commission structure have such high turnover rates? After reading books and speaking to a few VP of Sales, I realized that many just follow this norm because it is very difficult to find “scalable” alternatives to incentivize your sales employees. Yet just the other day, I spoke with an Apple employee and their sales people don’t receive commissions and were completely fine with it. But why?
After reflecting a lot, it comes down to the type of company I want to build. At TINT, I want to build a company that grows organically from providing true value to our customers while giving them the best experience, attracts + retains its employees by creating the best environment that fosters smart creativity and gives purpose, and challenges societal norms for the sake of advancing our potential as entrepreneurs.
So when I was questioned if we would have sales commissions while we were growing our team, I had to reflect what kind of company I wanted to create. If I want to build a company that gave our customers the best experience, I want our employees to guide them to success so our customers evangelize us afterwards. If I want to build a company that attracts and retains our employees, I want to give more purpose to their role and allow for more team collaboration to foster innovation. And if I wanted to build a company that would challenge societal norms to make a positive impact in the business world, it would be to question this common practice and share the learning.
TINT’s Value Statements.
How We Replaced Commissions with Monthly Team (Profit) Sharing Bonuses + The Formula
So after deciding to get rid of personal sales commissions, we replaced it with a monthly team (profit) sharing bonuses. I completely agree that people should still be properly rewarded for their hard work and extra mile they put in for the customer. But my take on it was that the whole team should be compensated because everyone touches the customer. For example, after a sales person closes the account, account managers will ensure the customer’s success while customer support will work with the engineers to make sure all their issues are resolved. Not to mention, marketing team draws the leads for the sales people to qualify and close.
Now everyone is incentivized to work efficiently to attract, close, and retain our customers. The bonus would be paid out every month because people can see what they did right and optimize, or understand where they fell short and iterate. But here’s the ah-ha: it would be split and shared fairly, not equally.
Our first version of our monthly team (profit)sharing bonus formula was here, and it was split equally among the team. It made sense when you had only 4 people on your team since everyone was equally contributing long hours, but as soon as we grew to 15+ people, inevitably there would be some people who put in more work, sold more, or added more value. That’s why, we split the monthly bonus fairly among the team members, and here is how we do it:
1) Calculate employee A’s monthly salary.
2) Calculate total team payroll per month.
3) Divide Employee A’s monthly salary over total team payroll per month to extract Employee A’s Employee %. This % shows where people stack up with others on the team.
4) Calculate total revenue for the month in company.
5) Calculate total base for the month in company (total base is the bar you need to hit in revenue, and anything above that is qualified for the bonus pool). Our base is calculated by 2 x the total team payroll per month. That means we expect everyone on our team to produce double their cost and anything above is valid for the bonus pool.
6) Subtract total base for that month from total revenue for that month to extract your reward pool for that month.
7) Take 20% of your reward pool and that is your actual bonus pool. This means we invest 20% of our extra cash back into our employees.
8) Multiply Employee A’s % with the actual bonus pool to determine bonus payout for that employee for that month.
Here is the formula with example numbers:
Employee A’s monthly salary: $6,000
Total team payroll per month: $120,000
Employee %: $6,000/$120,000 = .05 (5%)
Total Revenue for month: $340,000
Total Base: $120,000 (total team payroll) * 2 = $240,000
Reward Pool: $340,000-$240,000 = $100,000
Bonus Pool: $100,000 * 20% = $20,000
Bonus for Employee A: $20,000 * .05 = $1000 for that month
(Repeat calculation for your other employees– I bet it will be much quicker than calculating how many deals you closed for your personal commissions)
Now I know some of you reading up to here may say this won’t work for you, and I know this formula may not work in certain scenarios listed below:
– Your company is looking for top sales talent who thrive on personal commissions with high OTE
– You have a large team with large burn rate/expenses that can’t afford to pay out bonuses
– Your company incentivizes sales employees with other non-monetary perks or benefits
Note that I didn’t say you had to be profitable as a company. You can still follow this formula by substituting the revenue #s for target sales goals, base for your current expenses, and 20% to whatever % you want to reinvest into your employees. Whatever you decide, I recommend to balance what makes most sense to your employees AND your customers.
Our company has been practicing monthly bonus sharing for this past year. Not only has it been a great recruiting tool (because your candidates are excited to work with a company that reinvests in their employees), but also a huge increase in cross-team collaboration and around the clock energy to serve our customers. Our sales people still have quota, but they now don’t have to “force” a sale through annoying spammy techniques, which inevitably makes any customer bitter.
But it has not come without its doubts.
“You’re being too idealistic that this formula will work.”
“Without sales commission, you’re not going to attract top talent.”
“How do you compensate your sales employees base salary then?”
“If you don’t have sales commission, how are you going to scale to a team of 50 sales people and continually incentivize them?”
I’ve said it many times, and I’ll say it again here that this formula and practice is an experiment we’re committed to improve on. Sure we may be idealistic, but it just feels like the right thing to do, and it is reassuring to see all your employees want to stay around the office to work together.
We know that with this non-commission structure, we will lose out on top sales sharks that will just crush #s for us. But we’re willing to give that up to grow the type of company we want to build.
We pay our sales people higher than market rate because it lets them know we trust and believe that they will perform high (of course after vetted interviews). It’s the age-old saying that when you pay employees what you think they deserve, that’s the quality of work you’ll be getting back. We pay higher, we expect higher, and we get better results.
And lastly, for those who question if our employees will be de-incentivized without a sales commission structure, I tell them to give sales employees more purpose in their roles. Since we already expect high quality results from them, we give them autonomy to do what it takes to close a deal. This formula still gives them a goal to reach for a bonus payout, but now with much more innovative opportunities as they need to work with others around the team.
Team retreat collaborating on our future roadmap.
My only hope with this blog post was to share our learning and hopefully inspire other startups to question the sales commission norm. If you decide to follow it or see a way to better it, please let me know! There may be flaws in my argument above that I encourage you to call out in the comments or social channels below, and I can reply with my thoughts. There are a lot more factors in our company that allows us to follow this monthly profit sharing bonus that I decided not to include in here so this could still be a blog post and not a novel. I look forward to continually sharing our results by following this formula and I can’t wait to hear your thoughts.
– Tim Sae Koo
I’m @timsaekoo on Twitter | LinkedIn | Facebook