Money and Quotas Motivate the Sales Force Best

 
 
Bonus programs are effective for motivating sales people, but also costly for companies to maintain. Doug Chung and Das Narayandas study several compensation schemes to see which work best.
 
 
by Roberta Holland

It's well understood that cash bonuses often motivate a sales force to step up its game, but they don't work in every scenario and in some cases can backfire, a new study from Harvard Business School has found.

The key variable? Whether the sales rep had to do something to earn the bonus or was just given it—conditional versus unconditional.

Doug J. Chung, an assistant professor in the Marketing unit, and Das Narayandas, the James J. Hill Professor of Business Administration, explain what kind of bump managers can expect from different bonus plans in their working paper, Incentives versus Reciprocity: Insights from a Field Experiment, released in May. The pair used a consumer durable goods business in India as a real-world laboratory for the research.

"Running this kind of experiment is not the easiest thing in the world to do," Chung says.

But it does have wide implications. The more than 14 million people employed in personal selling in the United States alone represent about 10 percent of the entire country's labor force, according to the US Department of Labor. In addition, companies spend on average 10 percent of sales revenue on sales force costs, and a much higher percentage in B2B firms.

The problem for researchers in this area, according to Chung, is that companies are reluctant to tinker with their compensation plan, so it's difficult to come up with subjects to study. So previous research was usually conducted in a lab or with undergrad students or temps hired specifically for the experiment—not actual field research.

"Luckily, this company wanted to know about the compensation plan in more detail, so they were willing to experiment, and we took advantage of that," Chung says.

The Power Of Quotas

The researchers' main finding was that the company saw a roughly a 20 percent gain in sales when the bonus was conditioned on the salesperson hitting a quota. When there were no strings attached to the bonus, the gains dropped to half that in one scenario, and to a net decrease of 8 percent in another.

"In the sales force setting, people work harder if they're told a specific goal," says Chung, noting that 80 percent of firms in the United States use some type of bonus to reward employees.

The field experiment spanned six months in the second half of 2013, and involved 80 full-time salespeople from branches in four major cities in India. The salespeople, who were selling water purifiers, were not told they were part of an experiment; Chung says the four branches were selected far apart to limit any "watercooler effect" of employees comparing notes. Within the six months, there were 14 weeks of different compensation schemes tested, assigned randomly by branch, interspersed with control weeks.

At the beginning of a test week, the company would send a text message to members of the sales force in a given branch, telling those employees they were getting a certain bonus. The branches were under different conditions at different times. The bonuses were equal in amount—500 rupees (about $7.80) per week, or roughly 27 percent of normal pay.

Positioning a Sales Bonus

The researchers set up an experiment to test the effectiveness of incentive pay based on how the extra compensation was framed to the salesforce by the employer.

Message Communicated to Employee

Bonus
This week if you sell more than (weekly quota) units, we will give you an additional bonus of 500 Rupees, which will be paid to you in addition to your normal monthly pay on (date of payday).

Punitive
We have decided to give you a bonus of 500 Rupees this week, which will be paid to you in addition to your normal monthly pay on (date of payday). However, if you sell less than (weekly quota) units this week this payment of 500 Rupees will be taken away.

Real-punitive
We have decided to give you a bonus of 500 Rupees this week, which is enclosed in the envelope. However, if you sell less than (weekly quota) units this week this payment of 500 Rupees will be taken away from you on the next payday (date of the payday).

Gift
We have decided to give you a bonus of 500 Rupees this week, which will be paid to you in addition to your normal monthly pay on (date of the payday).

Real-gift
We have decided to give you a bonus of 500 Rupees this week, which is enclosed in the envelope.

Source: Incentives versus Reciprocity: Insights from a Field Experiment.

Three of the schemes were conditional, with a quota 20 percent higher than the typical sales volume, and two were unconditional. The conditional compensation schemes were termed bonus, punitive, and real-punitive. The bonus and punitive conditions were identical except for how they were framed. The bonus condition presented a positive spin: if you hit your quota this week, we'll give you a bonus. The punitive condition was framed negatively: we have decided to give you a bonus this week, but if you don't hit your quota, we'll take it away. The real-punitive scheme involved actually giving the bonus to the salespeople up front, with the warning it would be taken back if they didn't hit their quota that week.

“We thought in fear of not wanting to lose this money, they would work extra hard. That did not happen”

Results hardly differed between the three conditional versions, says Chung. He adds that the gains occurred equally among people classified as high performers or low performers before the experiment began.

"We thought, and even the company's managers thought, the real-punitive condition would be the one where the salesperson would show the most effort," Chung says. "It's the theory of loss aversion, losses loom larger than gains. We thought in fear of not wanting to lose this money, they would work extra hard. That did not happen."

Chung sees two factors at work. First, salespeople are exposed to bonus schemes on a regular basis, so they know it's not a one-time thing. And second, research has found that when a good is frequently exchangeable, like money, loss aversion is not present. If the reward was something like a motorcycle, the outcome may have been different, he says.

The unconditional schemes had two versions, gift and real-gift, both of which were given regardless of how the salesperson performed. The theory Chung and Narayandas were testing was whether employees given an unconditional bonus would reciprocate by working harder. In the gift condition, the sales team was told the company had decided to give each member a bonus, which would be paid at the end of the week. In the real-gift condition, the salespeople were told about and given the bonus at the same time.

The gift condition showed a 10 percent boost, but Chung points out the positive effect came mainly from the high performers. For the low performers "the effect was close to zero," he says.

In the real-gift condition, there was an average net decrease in performance by 8 percent.

"It actually hurt," Chung says. "I think it's because they thought they were being compensated for past performance. The thinking is, 'Hey, I must be doing something right thus far. I think I may be overworking, so maybe I should slack off.'"

An unintended finding of the experiment revealed a big difference in the effects of seasonal fluctuations in demand. High performers were not affected much, but low performers were hugely affected by seasonal demand, Chung says.

A Practical Guide

The researchers, who will present the findings to the company this fall, believe the research can guide management decisions. If the company wants to smooth out its sales, it should put high performers in areas with high seasonal fluctuation, he says. If the company is giving an unconditional gift, sales managers should expect to see a boost in productivity from just the high performers.

Chung says he is often asked by US or European sales managers whether the results would translate to their area or industry.

"My answer is basically yes. The study was conducted in India because that was the specific stage we chose, and it happened to be a firm that wanted to collaborate with us," he says. "But it's about basic human fundamentals of motivation. It would apply to any kind of setting that involves people wanting to motivate people."

About the Author

Roberta Holland is a writer based in Boston.

Post A Comment

    • Bill Shillito
    • President, North Carolina Wireless, LLC (a WISP)
    This is very timely. We are currently reviewing our compensation for the sales associates.
    This review and article is a excellent review for us.
    Thank you.
    • David
    • Owner, http://thegreatdivideco.com
    It is interesting to compare punitive vs. gift in encouraging your sales force to sell. Specifically, it is interesting how people receiving gifts figured they were being rewarded for past accomplishments. I think you definitely need to have clear motives when presenting bonuses to your sales team.
    • Harmeet Bhatia
    • VP -Sales, Jade Global Inc.
    In my experience , what always works well is the Philosophy of Accelerators !!! Most high performers are motivated by incentives on Quotas . But for a specific period , lets say Q4 for instance if you add an Accelerator Bonus on top of the normal incentive to achieve a higher quota, pushes the Sales team to bring in all deals that they can before end of the period as they see instant gratification.
    This also works well for under performers who may not have had a great year but see a chance to make the extra buck or compensate for the lost incentive by closing large business in the given period .....
    • Rafael
    • Financial Planning Analyst, Ferring Pharmaceuticals
    Very interisting. There is no more space for punitive motivation.
    • Josh Leeger
    • Account Executive, Apple
    In my experience, sales people are motivated by closing deals - by actually accomplishing a sale.

    Making more or less money, and suffering more or fewer rewards or punishments, is a secondary outcome - the result of actually selling (or not).

    Perhaps the authors could test this hypothesis - that an organization that improves a sales rep's chances of closing a deal, of actually selling things (for instance, by providing more (meaningful) sales support and sales tools, more and better-aligned marketing materials...in short, by creating a culture aligned with closing sales) will have better outcomes (more sales, and better-motivated salespeople) than one that does not, regardless of the compensation structure (base/variable, or reward/punishment).
    • Anonymous
    It is true that such Bonus scheme gets a sudden jump in sales. My experience is that if a scheme is one off, the sales in the next period will be lower. Schemes need to be continuous. A sales person cannot continue to push without genuine demand. Sustainable sales, requires a right product and right marketing to generate desire to buy in the first place.
    • Tema Frank
    • Chief Instigator, Frank Reactions
    It has long been known in psychology that reward works better than punishment. Thus the result in the first part of the study.

    The second thing that disturbs me about this research is that encouraging people to make sales, with no controls on the quality of those sales, can really backfire. They may make promises the company cannot keep. They may sell to people for whom the fit is not good so they end up becoming unhappy customers. etc.
    • David Physick
    • Consultant, Leadership Physic(k)s Ltd
    But beware the banking crises, both in retail (selling payment protection insurance), corporate (selling interest rate swaps) and investment (manipulating LIBOR and FX).

    Dan Pink's work around motivation is key. The "do this and you'll get that" form of extrinsic motivation is imbued with risk. Better still to establish purpose (so not just selling another widget but something that genuinely improves the buyer's circumstance), mastery (train them to be really good at sales and customer experience) and give them autonomy (to make the deal without "giving away the farm"). That more rounded approach to motivation is more effective in the long-term.
    • kapil Kumar Sopory
    • Company Secretary, SMEC(India) private Limited
    Monetary intensives do help to accelerate performance and thereby improved outcomes. To simultaneously keep the sales person aware that non-performance would lead to forfeiture of the incentive is a good strategy to enhance pointed focus on the goal so as to achieve and not lose.
    My only concern is about the quality of the end result and the real improvements gained for long term effect.
    While I was a senior executive in a commercial bank, we had been providing incentives to staff for getting new business by opening of more and more deposit accounts. However, we did not prescribe any minimum deposit and the period for which it would have to be retained. Later analysis revealed that while many new accounts were opened, the corpus did not increase proportionately. We had to revise the incentive scheme and prescribe specific requirements.
    This is just a small example and sales persons could permute and combine schemes to derive unbecoming benefits. Hence, managements have to be very careful and not put to practice schemes without due thought.
    • Christopher Pereira
    • Head of Training and Development, Al Yasra Fashion
    Recognition is powerful motivator. When people are given time from senior leaders in the business and recognized in front of their peer group, they feel proud, feel respected and become even more confident and motivated.
    Setting targets and goals for sales people is a fundamental, but I agree with David Physick's comments greatly.
    Outstanding achievers above the set targets must be specially recognized with bonus as this creates or drives up the average benchmarks which people must perform too.
    Realistic and challenging targets get better performance.
    Mediocre targets reduce ability.
    • Dr. R. Krishna
    • President, Sales Solutions Pvt Ltd
    In true sense, when i was a salesman, what motivated was to be branded as a performer. Good fixed salary n regular reviews mattered the most. Bonus was incidental.