Let’s get sales incentives right

Salespeople who are engaged in their roles, who are motivated to succeed, and who’s goals are aligned with the organizational goals have been shown to have a significant impact on helping an organization succeed (Badovick, Hadaway, & Kaminski, 1992). Successful organizations understand this and try to keep their sales employees motivated and engaged through a variety of motivational methods – mostly involving extrinsic rewards. While much has been much written about how extrinsic rewards may have a detrimental effect of on a sales person’s intrinsic motivation (Deci & Ryan, Kohn, or Pink) there is little disagreement on the short-term impact that extrinsic rewards can have on a company’s performance. The short-term benefit of extrinsic rewards assures us that these rewards will be used in businesses no matter what Alfie Kohn or Dan Pink has to say on the topic.

It is important then that we get sales incentives right.  We need to ensure that as leaders, we are not limited in our thinking about how we can structure sales incentives and how they operate.   We must look at optimizing how our incentive plans are designed, the type of reward that is offered, and how goals are set.

Extrinsic Reward Program Structure

There is a very clear framework, based on the research that suggests that extrinsic reward programs should be designed such that the rewards are contingent on achieving increasing performance goals.  By doing this, companies not only limit the negative impact that extrinsic rewards can have an intrinsic motivation, they also increase the actual performance that extrinsic rewards drive.  This means that the use of non-contingent incentive rewards should be limited.  It means that incentive plans that are strictly “do this – get that” are not optimal.  Contests that rank people against one another also are not optimal as they only provide feedback that the sales person did better than the others – not against a goal.

Extrinsic Reward Type

The typical reward for performance is usually cash.  When surveyed, over 70% of sales people indicate that they would prefer cash.  However, there have been studies that show non-cash rewards (i.e., trips, merchandise) have a bigger impact on performance than cash alone.  This does not mean that one would replace their annual sales incentive programs cash bonus with rewards of trips and tv’s – but it does mean there should probably be a mix.  It should also be noted, that sometimes extrinsic rewards are based on fulfilling the drive for Achievement and as such, do not require significant outlays of dollars – recognition of performance by senior leaders can be a significant motivator for sales people.

Goal Setting

A majority of sales incentive plans have goals that are provided to individuals.  Goals are good – they have been shown to increase performance across a myriad of environments (see Locke and Lathum).  However, we’ve seen significant backlash against goals when they are not understood or felt to be so out of reach as to be laughable.  The negative impact of this can outweigh any positive motivation that you get from the incentives.  Goals must be understood and bought into (i.e., perceived as fair) to be effective.  There are a number of ways that companies can do this, but they often require changing systems and processes that have been in place for years.  The key is to get the setting of individual sales goals to be as close to the sales representatives as possible, while still ensuring that they align with the company sales objectives.  The science (or art) of this can be very daunting – but trust me, I’ve seen it done.  One simple way to help is to provide a means for front-level managers to effectively shift quota from one territory to another but provide mechanisms to ensure fairness.

Of course extrinsic rewards are just one piece of the motivational puzzle and shouldn’t be used as the only lever to drive motivation and engagement.  The key is to ensure that the incentives are right and that they do not detract from the other methods of motivation.

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2 Comments

  1. I enjoyed this post very much. As a sales manager with 15+ years working and motivating sales people I especially liked the idea in the post that sales incentives should involve something other than cash. However, no matter what cash is still king amongst salespeople and companies need to remember that. Finally, I disagreed slightly with one point. If everything is fair (comparable territories, products etc.) then pitting salespeople against one another to see who is #1 is fine and if it is managed correctly is the perfect way to motivate, retain, and grow salespeople. Overall I really enjoyed reading your post and thought it was spot on!

    Al Colmenero
    Chief Sales and Marketing Officer
    DVS Visual Systems

    • thelanterngroup

      Al,

      Thanks for the comment. Just to clarify, ranking plans can be beneficial if they align with your company’s objectives and philosophy and also if they are structured correctly. Our experience with them has shown that if they are done improperly, they can have a significant decrease in motivation. For instance, we just finished conducting a series of focus groups with sales reps from a large pharma company that has a new ranking plan in place. The satisfaction level with the plan is the lowest I’ve seen in my 17 years of doing this work. The main qualitative reason they disliked the plan – they were ranked against other sales reps that they needed to partner with! They called on the same docs, they worked the same accounts, but they were de-motivated to work together for fear that their “partner” would outperform them. The other factor that they mentioned, is that they could not track their actual performance – because they never new if their ranking was going to rise or drop because of “others” actions.

      In my humble opinion, ranking plans work well for some short-term contests, or as a recognition trip rule structure, or if you have goals or targets that are significantly off from reality or can’t predict targets (i.e., new product launch). I would not typically recommend this structure for a standard incentive compensation plan structure.

      Thanks again for the great thoughts!

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