How to really motivate salespeople
How to really motivate salespeople
(by Doug J. Chung, Harvard Business Review, April 2015)
Summarized by Sander Lietaert and Deva Rangarajan, Vlerick Sales Centre
Sales managers spend inordinate time listening to the representative’s complaints about the compensation. The quotas are set too high, territories are substandard and that limits their ability to sign new accounts. A company likes to play around with the system’s components to try to find better ways to motivate salesmen and boost revenue, or to increase the return on the money it spent paying salespeople. This article provides evidence that some standard compensations practices probably hurt sales. Research based on field experiments is yielding new insight into how the timing and labeling of bonuses can affect salespeople’s motivation.
The dangers of complex compensation systems
The principle-agent theory describes the problem that results from conflicting interests between a principal and an agent hired by that principle. A company wants an employee’s maximum output, but a salaried employee may be tempted to slack off and may be able to get away with it if the company cannot observe how hard the employee is working. To get the optimal work out of a particular salesperson, you should in theory design a compensation system tailored to that individual. However, such an individualized plan would be extremely difficult and costly to administer, and companies fear the “watercooler effect”: salespeople might share information about their compensation with one another, which could raise concerns about fairness and lead to resentment. So for now, individualized plans remain uncommon.
Several instances of research has found that the more uncertain a firm’s sales cycle, the more a salesperson’s pay should be based on a fixed salary. The less uncertain the cycle the more pay should depend on commission.
Companies choose the commission system for at least three reasons. First, it is easy to measure the short-term output of a salesperson, unlike that of most workers. Second, salespeople have traditionally worked with little supervision: commission-based pay gives managers some control, making up for their inability to know if a salesperson is actually visiting clients. Third, studies of personality type show that salespeople typically have a larger appetite for risk than other workers, so a pay plan that offers upside potential appeals to them.
Using real company data to build understanding
Companies are sharing sales data with researchers in the hope of developing better tools to motivate the sales force. This empirical study examined how the components of the sales compensation plan affected various kinds of salespeople: high performers, low performers and middle performers. The authors found that although the salary and straight commission affected the three groups in similar ways, the other components created different incentives that appealed to certain subsets of the sales force.
For instance, overachievement commissions were important for keeping the highest performers motivated an engaged after they would hit their quotas. Quarterly bonuses were most important for the lower performers. Whereas the high performers could be effectively incentivized by a yearly quota and bonus, more-frequent goals helped lower performers on track.
This research also suggest that the firm would benefit if it shifted from quarterly bonuses to cumulative bonuses. Under a regular quarterly plan, a salesperson who misses the target, for instance 300 units, in the first quarter but sells 300 units the second quarter will still get the second-quarter bonus. Under a cumulative system, the salesperson needs to have cumulate sales of 600 units to get the second-quarter bonus, regardless of his first-quarter performance. Cumulative quotas do a better job of keeping salespersons motivated during periods in which they are showing poor results, because salespeople know that even if they are going to miss their number, any sales they can squeeze out will help them reach their cumulative number for the next period.
How to create a sales compensation plan
In general, it is important to prevent salespersons from feeling that unfairness or luck plays a part in compensation, and resetting quotas can contribute to that perception. It is crucial to keep quotas at the right level to properly motivate people. The author suggest a pay system with multiple components, one that is not overly complicated but has enough elements to keep high performers, low performers and average performers motivated and engaged throughout the year.