Sales, in Black and White: How a Commission Plan Killed a Company

Sometime in the 1980s, Microsoft co-founder Bill Gates asked Encyclopaedia Britannica about putting its encyclopedia on a disc. Britannica said no.

Most tellings call Britannica’s decision a failure of vision. “A two-century-old company couldn’t see the future, so the future ran it over.” It’s a tidy story, but how accurate is it? Britannica’s leaders saw the disc coming. They understood it. They eventually built one. What they couldn’t do was sell it, and the reason sat in a document most people in the corporate offices would have called an administrative detail.

It was the commission plan.

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The Four-Step Sales Comp Plan Audit You Need Now Instead of Later

What the Sales Rep Earned

In the early 1980s, a print set of encyclopedias sold for $1,500 to $2,200. The salesperson who carried it into a prospective buyer’s house earned $500 to $600 of that total, if the purchase was made. That was the deal, and it was the company’s entire distribution strategy.

Britannica had no retail channel worth the name. It had people who sat at kitchen tables and told parents a set was an investment in their child’s future. The pitch worked because the person making it had several hundred dollars riding on it. The commission wasn’t a cost of selling encyclopedias. It was how encyclopedias got sold.

A Disc on the Kitchen Table

Now put a disc on that table. It costs a fraction of the print set, so it pays a fraction of the commission. Ask the rep to lead with it. They won’t. Not out of disloyalty. They’ll do exactly what the plan told them to do, which is the only thing a plan can make anyone do. A rep who leads with the disc earns a sliver of what a rep who leads with the set earns. Multiply that across a sales force and you have a company that can’t sell its own best answer to the threat in front of it.

Microsoft licensed Funk & Wagnalls instead, the second-tier reference work every library owned and nobody bragged about. By most accounts that compared the writing, it was the weaker encyclopedia. It didn’t need to be better. It needed to ride a distribution path Britannica couldn’t use: the personal computer (PC) itself. Encarta launched in 1993 at $395, dropped to $99 within the year and then started shipping free on new Windows PCs. Households ended up with an encyclopedia without ever deciding to buy one.

Britannica cut the price of its own disc, from $995 to $495, at the end of 1995. By then, the company had already put itself up for sale.

Lost in the Compensation Plan

Here’s what this tale keeps coming back to. The Britannica plan was a good one. It tied effort to revenue, made its best sellers wealthy and led its category for decades. It did precisely what it was designed to do, right up until the company needed it to do something else.

Most companies treat the incentive plan as downstream. Strategy gets set first, and the plan is built to carry it out. Britannica says it can run the other way. By the time the disc reached the boardroom, the commission structure had already answered the question, years earlier, and nobody in the meeting was thinking about it.

Britannica never lost on quality. It lost in the sales compensation plan, the one place nobody was looking, and every company that pays people to sell has one. So, here’s a question worth an hour of any leadership team’s time: “What is our plan quietly making impossible?”

There’s a specific trap inside that question. And, there’s a way to spot that trap in your own plan before the market does.

That’s all laid out in the companion article for WorldatWork members.

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