15 Sep. 2017 | Comments (0)
Companies typically compensate their sales force by using some combination of salary, commission, and bonuses, but executives are often unsure of which incentives provide the best motivation. For example, should bonuses be tied to quotas or should they be given unconditionally? For a quota system, would it be better to use bonuses as a reward (giving them to those who meet or surpass their quotas) or as punishment (taking them away from those who fail to meet their quotas)?
To investigate these questions, we conducted a randomized field experimentat a large Indian company that manufactures and sells consumer durable goods. The firm’s sales force consists of over 5,000 people who are responsible for selling multiple product lines, including water and air purifiers, vacuum cleaners, security systems, and ancillary services. In the experiment, conducted over a six-month period in four urban cities (Delhi, Bangalore, Mumbai, and Hyderabad), we assigned different weekly bonus schemes to 80 full-time salespeople. These bonuses were substantial, representing about 27% of the monthly wage of an average salesperson at this company, and they were awarded either conditionally, according to performance, or unconditionally.
We assigned the salespeople to different bonus treatment groups. Some received conditional bonuses, which we tied to sales quotas under three different treatments: standard, punitive, and real-punitive. In the standard treatment, we gave a bonus payment after a salesperson achieved a weekly sales quota that was set 20% higher than what that individual had previously sold. The punitive treatment was identical except for the framing: We told salespeople that failing to receive a bonus was a penalty for failing to achieve their quotas. And in the real-punitive treatment, bonuses were awarded at the start of the week but then withdrawn for those who didn’t meet their quotas.
Some people received unconditional bonuses, which were given irrespective of their sales performance. The goal was to encourage reciprocity, whereby salespeople would increase their work efforts in appreciation for the firm rewarding them with extra monetary compensation. These bonuses were awarded under two different treatments: delayed and immediate. In the delayed treatment the bonuses were communicated to the salespeople at the beginning of the week, and payment was made at the end of the week. In the immediate treatment salespeople were simultaneously informed of and awarded the bonus at the start of the week.
Analyzing the resulting data, we found that the conditional bonuses were, on average, more than twice as effective as the unconditional bonuses. In fact, such conditional compensation resulted in a sales increase of approximately 24%. But, interestingly, we found little evidence of a difference between the standard and punitive treatments. This finding runs counter to loss-aversion theory, which stipulates that people’s desire to avoid a loss will be stronger than their desire to attain an equivalent gain. Our results also indicated that a conditional bonus could potentially demotivate salespeople over time: Salespeople’s performance was higher during weeks of a bonus treatment but lower in weeks after a bonus treatment. This result is consistent with past behavioral research that has found that too much extrinsic motivation may actually lead to a decrease in intrinsic motivation.
For the unconditional bonuses, we found that they were effective only when they were distributed as a delayed reward. Awarding salespeople with bonuses at the start of a sales period had no significant effect on their performance. It could be that, even though they were told otherwise, the salespeople considered the immediate bonus to be compensation for their past performance, instead of a reward for their future performance. Another interesting result was that the effectiveness of the delayed bonuses appeared to decay when such a reward scheme was repeated over time: The effect size became marginal toward the end of the field experiment.
We also investigated how the various types of bonuses might affect people differently. We found, for example, that the unconditional bonuses tended to be more effective for salespeople with a higher base performance, which supports the idea that high performers generally have more goodwill toward the company and thus are more likely to reciprocate by increasing their selling effort. In contrast, the conditional bonuses were equally effective across all types of performers.
Our results have implications for companies trying to more effectively manage their salespeople. In general, sales force costs often represent the single largest investment for an organization, averaging about 10% of sales revenues, and up to 40% in B2B markets. As such, companies would do well to understand how best to motivate their salespeople, and to that end, judicious bonuses can be an effective tool.
Unfortunately, in our field investigations, we found that executives often make decisions about sales force compensation based on their gut feelings and past practices, not on quantitative data. Before our experiment, the head of field sales and many regional managers of the Indian firm predicted that the real-punitive approach would be the most effective. Yet our results indicated that overall it was no more effective than the other conditional compensations.
The lesson is clear: Sales force compensation is a tricky issue, requiring decisions based less on intuition and conventional “wisdom,” and more on hard, quantitative data. We encourage companies to periodically experiment with their compensation systems, such as we did, as there is no clear-cut, magic rule for an optimal scheme. Firm and national culture are different, and so are people.
This blog first appeared on Harvard Business Review on 09/12/2017.
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