The Dark Side of Sales
While unleashing the “animal spirits” of your sales team, beware of the unintended consequences that powerful incentives can create.
Legendary investor Charlie Munger famously said: “Show me the incentive, and I will show you the outcome.” To that, I would add “and the unintended consequences.” All sales incentive plans are based on Munger’s aphorism, but without that second part, the lesson is left dangerously incomplete.
An aggressive sales team can be a fast-growing startup’s greatest asset or its greatest liability. Sales is the only team in the company that operates under a strict incentive plan, which dictates that sales reps hit quota to earn commission or get fired. While this incentive structure is necessary to motivate and retain the best sales people, it also creates a crucible of pressure which can breed bad behaviors.
Problems often occur when founders are too trusting of the alignment created by a sales incentive plan. Many founders believe that once the incentive is set up, the Sales team will largely take care of itself without much need for supervision. This “set it and forget it” mentality can lead to a rude awakening when perverse incentives arise and produce unexpected results. As a well-known sales adage warns, “you get what you inspect, not what you expect.”
I will first describe ten perverse incentives that sales plans can create, then provide ten solutions to correct them. Together, these solutions comprise a “sales compliance regime.” This is the essential companion to the sales incentive plan that I’ve written about previously. Both are needed to scale a fast-growing startup — one to unleash the “animal spirits” of the sales team, the other to tame and control them.
Sales Incentive Problems
Problem #1: Over-selling
Sales incentive plans are very specific about quotas — numerical targets specifying how much should be sold. They tend not to specify what is being sold, as that is taken for granted. As a result, the rogue or mercenary sales rep is liable to sell anything to make quota, whether the company actually can deliver that product or not.
A dramatic example of this occurred at my company Yammer when a new sales rep closed a million dollar deal out of the Middle East his second month on the job. As this was our first deal from that territory, we were all quite pleasantly surprised, and the new rep was being lauded and hoisted on shoulders — until we scrutinized the deal and discovered that he had sold our source code. As Yammer was a cloud service, our source code was most definitely not for sale.
This comically extreme case was easily corrected. The more common case is that sales reps will puff or over-sell their product’s capabilities to a point where the future customer will be disappointed in the product actually implemented. This behavior will typically fly below the radar until the downstream effects on churn and NPS are felt in customer support, by which time it’s not the sales rep’s problem anymore.
If sales reps thought only in terms of the company’s equity value, a sale that results in a churned customer would make no sense, but the pressure to hit a quota can produce more short-term thinking.
Problem #2: “Drive By” Reps
Even the best sales people will hear the word “no” many times on the road to getting to “yes.” But how they handle a “no” matters a great deal. A prospect who says “no” today could be a “yes” in six months or a year, especially in a bottom-up SaaS context where the prospect remains a free user. However, if that prospect has a bad experience with a sales rep who torches the relationship, your company will lose them forever as a potential customer. Worse, you will likely never know why as companies have no way to track the NPS of prospects who never become customers.
So you don’t want “drive by” sales reps who burn a prospect just because it can’t help them achieve the current quarter’s quota. At the very least, reps should be recording the reason(s) the customer is not a sale today. You want reps thinking long-term and continuing to interact positively with potential customers in the hopes that at some point, the product and customer will be a match and a deal can be closed.
Problem #3: Poor Customer Handoffs
Sales is incentivized to close deals with customers, not to implement the product for those customers. The salesperson typically hands off the new customer to the Customer Success team. If the salesperson immediately forgets about the customer, the handoff will be poor. If the salesperson remains involved, the handoff is smoother and reduces the possibility of churn. One way to encourage better collaboration between Sales and CSM is to withhold quota credit for a sale until the customer has been successfully implemented. Tie handoffs to commissions and you will get better handoffs.
Problem #4: Conditional Revenue
You cannot allow Sales to determine when a deal is really a deal. If you leave “revenue recognition” in the hands of the sales team, you will get a lot of “deals” that are conditional. In other words, they will only generate true ARR in the event certain conditions are met, or they allow the customer to withdraw after a probationary period or to cancel at any time. Such deals do not meet the standard “rev rec” definition and shouldn’t count for quota credit. It should be left to the Finance department to define a rev rec policy and determine if a deal truly belongs in ARR.
Problem #5: Statements of Work
Statements of Work (or SOWs) are an offshoot of the conditional revenue problem that are pernicious enough to warrant their own category. As a general rule, I am opposed to SOWs attached to deals that promise specific features or components to be delivered later as a condition of the deal. These hamstring your company in two ways. First, it makes the revenue from the deal conditional, and conditional revenue should not be counted in ARR. Worse, it undermines the flexibility of your product roadmap, tying it to the mast of a customer’s particular, often idiosyncratic demands.
It’s tricky because you want your Sales team to sell the vision of your product roadmap. SaaS vendors are selling ongoing subscriptions, and customers want a sense of how the product will evolve and improve over time. But if you allow your Sales team to give customers control over how your product roadmap evolves, it hijacks the engineering lifeblood of your company. In the extreme, it turns your company into a consulting shop, solving idiosyncratic problems for individual customers instead of shipping new products and features to all customers.
Even if you think you know how your product will evolve, you don’t want to attach SOWs to sales contracts. It’s hard to foresee product evolution even 1-2 quarters ahead and you could get locked into a feature that ends up being deprioritized. If you absolutely have to agree to a SOW to win a critical deal, then only do so if the feature is already in development and you know its delivery date.
Again, it’s fine to sell the vision of what your product is going to be, and even to share a product roadmap deck with customers. But don’t let them attach SOWs as a condition of the contract.
Problem #6: Contractual Liability
Sales should never be exclusively in charge of negotiating the legal agreements required to consummate deals. Sales incentive plans specify quotas but not deal terms, so sales reps will sacrifice deal terms to hit quota if given the chance. If you allow sales reps to redline contracts, for example, it becomes too tempting for them to agree to changes and effectively give away the store. You should give Sales reps a menu of approved options they can agree to, but beyond that the deal should be referred to Legal for final negotiation and signature.
Problem #7: Metrics Creep
If the Sales department is responsible for its own metrics, the metrics will inevitably evolve in ways that make it easier for them to hit their numbers. It’s not uncommon to find sales leaders in the midst of a tough quarter coming to the CEO to explain that the previously agreed upon metrics or goals are not the best way to track success. The sales leader will suggest new metrics that are more “accurate” or “aligned” and just happen to make it easier for them to look successful at quarter’s end. In some cases the sales leader might actually have a point, in which case adjustments to the next quarter’s goals and quotas may be warranted. But you don’t want “metrics creep” mid-quarter just because things aren’t going well. Just like with contractual liability and conditional revenue issues, the way to deal with this is to take these strategic decisions out of the Sales department’s control. Let Finance define and report the metrics, just as it has responsibility for revenue recognition.
Problem #8: Regulatory Compliance Failures
As a general rule, if you make Sales responsible for both commissioned and noncommissioned activities, only the commissioned activities will occur. If the noncommissioned activities include legal compliance, you have a big problem. Salespeople will inevitably view the rigors of legal compliance as a lot of hard squeeze for no juice. While they can be forgiven for this perspective given their incentive structure, you cannot allow your company to sacrifice compliance. Legal requirements must be enforced on the Sales team by a compliance team that it is not part of the sales incentive plan. What you don’t incentivize, you must require.
Problem #9: Toxic Sales Culture
Your VP of Sales sets the cultural tone for the Sales team. If your sales leader is myopically focused on hitting the number at any cost, that attitude will pervade the entire Sales department. This will typically happen with a first-time sales manager who has been promoted from an AE role and is still thinking like one. You need their focus to shift toward emphasizing quality control while still hitting the number. If they prioritize correctly, the Sales team will do a better job of policing itself and make your job easier.
Problem #10: Sales-only CEOs
This is a more extreme version of #9 where it is the founder-CEO who has a sales mentality and whose mind is still wired around the particular pressures and incentives of a salesperson. In theory, there is nothing wrong with a founder whose skills were forged in the crucible of sales. In fact, it can be a huge asset, and I have often recommended that founders with a technical background partner with someone with sales experience. But if a sales-oriented person does rise to the rank of CEO, they must think like a CEO first and a salesperson second. It isn’t just about hitting your numbers when you’re in the big chair; you must also consider your company’s culture and reputation. You have to balance the incentives of sales with quality control, honest accounting, and legal compliance.
If sales-oriented CEOs don’t adjust their thinking, they will allow some or all of the bad behaviors documented above to fester until the company faces a crisis. They will dismiss legitimate concerns as “antagonistic” and excuse compliance failures as clever hacks. They will push growth at any cost, and view the time spent on audits, inspections, and legal compliance as slowing down the vital business of the company. They will disregard prudent concerns about burn or unit economics, which should act as a governor on growth. They will always side with the Sales team against other departments which are properly tasked with reining them in.
A company might survive a VP of Sales being too narrowly obsessed with “crushing it” at the expense of all other factors, as long as the CEO provides supervision and balance. But if the CEO is also wired that way, your company could be headed for a crash.
The Sales Compliance Regime
The unintended consequences of the sales incentive structure can be balanced and corrected by creating a sales compliance regime to go along with the incentive plan. That consists of the following elements:
Immature sales leaders believe their job is to hit quota, as if they’re glorified sales reps. More seasoned sales leaders see it as their job to enforce the right behaviors (compliance) without missing the number. It’s really just an adjustment of emphasis whereby hitting the numbers is balanced with maintaining the integrity of the numbers.
Breeding a strong culture helps sales reps stay focused on the big picture and avoid short-term, mercenary behavior. This is why you need sales kickoffs every quarter, which not only set quotas but also define the terms and boundaries of what and how you’re selling. Make sure everyone is brought together for that – I question whether fully remote teams can truly scale the type of culture necessary to maintain sales compliance.
Provide strong product training for the sales team that gets refreshed every quarter. This will keep sales reps up to date on the features and capabilities of the product. Product managers should present at sales kickoff every quarter, showing off the new features and what’s on the roadmap. Every sales rep should dogfood the product and know how to demo it. Training the team on objection handling also reduces the temptation to improvise answers that may not be accurate. Sales reps are much less likely to make it up as they go along if they are informed and taught best practices for closing deals.
Develop your ideal customer profile and qualify leads early in the sales process. If Sales is chasing its tail going after customers that aren’t right for your product, then reps will be more tempted to change your product on the fly to make a customer right for it.
Compensating early reps with meaningful equity, not just cash, will help align them with the company’s long-term success. The earlier in the company’s life, the more it makes sense to give reps equity. Those early sales people are going to help you figure out key aspects of your sales motion and strategy, so you want to strategically align them like other critical employees. As the company gets more structured and has stronger guardrails, the incentive plans can focus mostly on cash. But when Sales isn’t a machine yet, equity can help balance incentives.
#6: Customer Success Feedback Loop
You need to have some sort of feedback loop and control mechanism so the wrong customers aren’t sold and the right customers aren’t over-sold. Some startups will claw back commissions if a customer churns in the first three to six months. Sales reps absolutely hate clawbacks because they feel like they’re being charged for a customer support mistake. Invariably this leads to angry finger-pointing between Sales and CSM. But at a minimum, quota credit should require the successful implementation of a customer, not just their signature on a contract.
#7: Common Denominator Product Feedback
Sales should have a strong voice in the evolution of the product roadmap since they are hearing the front-line objections from potential customers. But this feedback must consist of common denominator issues across customers, not just the latest idiosyncratic feature request that a salesperson needs to close the deal at hand or ad hoc suggestions based on the latest sales call. A good way to synthesize sales feedback is to track loss reasons for every deal and then review monthly to find the common denominators.
#8: Checks and Balances
Never let foxes guard the hen house. Noncommissioned but vital activities like rev rec, analytics, and regulatory functions should be owned by teams outside of sales who are not compensated based on the company hitting quota. This is not a reflection of a lack of trust in Sales, but rather a recognition that Sales doesn’t have the incentive to focus on noncommissioned activities at the expense of commissioned ones.
#9: Auditing and Inspection
Sales leaders should constantly inspect the sales pipeline. To enable this, sales reps should be required to keep deal status up to date in a tool like Scratchpad. You can also use AI-enabled call monitoring software like Orum and conversational intelligence tools to record and audit every sales call. If you find reps are “churning and burning” prospects who say no, or are over-selling or making impossible promises to customers to get to a yes, they either need retraining or shouldn’t be sales reps at your company.
Sales is all about creating a repeatable machine. To achieve this, you will need to define every stage of your sales process and refine it over time. This is how large companies are able to scale huge sales forces with fairly consistent results and quality levels. You will get better at everything over time; just realize that putting reps on an incentive plan is a necessary but not sufficient condition for getting the results you want.
Incentives work powerfully well, perhaps in some cases a little too well. If you don’t inspect and supervise your sales practices carefully, you could find yourself unpleasantly surprised by some of the behaviors you end up incentivizing. If you establish and maintain an effective sales compliance regime, your incentive plans will drive healthy growth in your company. Fail to do so, however, and you will find undesirable behaviors growing as well.
Thanks for reading Bottom Up by David Sacks! Subscribe for free to receive new posts.