Want to stop mis-selling? Be like Apple, and get rid of sales commission

http://www.theguardian.com/commentisfree/2014/may/18/stop-mis-selling-apple-no-sales-commission-eon

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Anyone who imagined mis-selling was an aberration peculiar to Wall Street in the frenzy leading up to the 2008 financial crash should think again. Mis-selling – of individual mortgages up to the worthless derivatives knowingly foisted on to customers by cynical investment banks – certainly featured large in the scandals. But payment protection insurance (PPI), the granddaddy of the reckless hard-sell (cost so far: £22bn), predated the crash by half a decade, while energy giant E.ON's £12m fine, following £28m levied on Lloyds Banking Group earlier in the year, suggests the practice is as hard to root out as Japanese knotweed.

Contrary to perceptions, however, the persistence of rogue selling is primarily not an ethical but a design problem. The conventional way of paying sales staff is wholly or usually partly by commission. Without commission, why would they perform? Unfortunately, incentives of any kind are a double-edged sword, and in sales, as the fines show, they can come back to bite those that use them in a uniquely painful way.

The problem is not that incentives such as sales targets don't work, it's that they do. They change people's behaviour – but not necessarily in ways that are legislated for. Thus, to make their targets, salespeople can bring sales forward, book sales now and cancel them later – or, as in the case of banks and E.ON, sell people products that are unsuitable or risky and loaded with small print.

In the case of Lloyds, one adviser sold protection products to himself, his wife and a colleague to make up his total and avoid being demoted. According to the Financial Services Authority, the majority of bank incentive schemes encourage mis-selling in the same way. In fact, so systematically do targets produce unexpected consequences of this kind that a former adviser to the Bank of England, Charles Goodhart, devised a law to express the phenomenon, usually formulated as, "When a measure becomes a target, it ceases to be a good measure" (because people instantly find ways around it).

But this is not because people are naturally bad apples – they are responding rationally to what the system demands of them. The perverse result is often a corporate arms race in which so much salesforce and management energy is diverted into gaming and policing the system respectively that the needs of the customer are ignored.

At the extreme, as in the case of the financial sector in the run-up to 2008, poorly designed sales schemes can bring whole companies down. As the statistician and quality guru W Edwards Deming wrote: "People with targets and jobs dependent upon meeting them will probably meet the targets – even if they have to destroy the enterprise to do it."

It's tempting to suggest that the remedy for mis-selling is tighter and more comprehensive regulation. Tempting but mistaken. The solution is simple. It is to stop using sales incentives altogether. Such devices are in any case divisive – why should one part of the organisation be paid differently to others? – promoting competition rather than co-operation and, like all incentives, they focus attention on the money rather than the customer, with the counterproductive results that keep recurring.

Companies that have given up the bad habit report more co-operation, better understanding of customer needs, and greater customer loyalty. Perhaps the most notable example is Apple. Apple doesn't pay its retail sales staff commission – but its stores have the highest sales per square foot in retail, and its customer loyalty is legendary. EON, meet Apple.