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 – note: there is also a lot of research on how this extrinsic/intrinsic effect can be mitigated) 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 Dan Pink has to say on the topic. However, this does not mean that these types of programs can’t be improved.
Successful organizations and leaders of the future not only need to focus on the optimization of extrinsic reward programs but also on moving other levers within the organization that can drive sales motivation. Using the Four-Drive Model of Employee Motivation (Lawrence and Nohria, 2002) provides a clear framework for how to do this.
So Amazon is leaving the incentive market which they just entered three years ago. From all reports it isn’t because the venture isn’t profitable, but instead it is about ensuring that their brand and their customer service reputation are not sullied. Paul Hebert in his blog wrote, “the decision was made to drop fulfillment through incentive programs due to customer service issues. Specifically, the recipient, if they had problems with their order, would call Amazon for resolution but Amazon would have to refer them back to the incentive company – who in turn would do the due diligence to fix the problem. From Amazon’s point of view this created a negative impression of their customer service.” In a nutshell, they are taking a hit on millions of $ to make sure there is no negative impact on the billions of $ that they do in their non-incentive business. In my mind, that is a pretty smart move (one that you wouldn’t see a lot of businesses making). Now I’m sure there are other factors (i.e., tax issues, not controlling the customer relationship, etc…). Nothing is ever quite as black and white as it seems.
In the short time that Amazon was in the market, they shook it up. They offered a new way of fulfilling incentive program offerings. With their great number of items, their back end processing and handling, drop ship expertise, and their low price points, Amazon was able to provide even the smallest incentive companies with a very sophisticated e-catalog of incentive goods. No longer did an incentive house need to have the large capital expense of a warehouse and stocking products. Amazon was able to provide the back-end seamlessly for a price that couldn’t be beat.
Playing against Amazon
I was part of a large pitch (as a partner with a traditional incentive house) last fall to a company that loved what we did, trusted our customer service, thought that our creative approach was the best and liked the way we brought behavioral science into the process (i.e., The Lantern Group) – but, ended up going with a different company because they could offer more merchandise at a lower cost point. How did that other company do it – they used Amazon as their fulfillment partner. At that point, I thought I saw the writing on the wall – that the days of making large margins on merchandise were all but over. How could the traditional companies compete, when smaller, more nimble and aggressive firms could come in and under-price while having a larger item selection and great fulfillment services. In the debrief with the company about why we lost the business, the purchasing agent said, “…this is the wave of the future, all [incentive] companies should be doing this.” It was going to be a new world – and I was excited!
Changing the game
For years the pricing model used by incentive companies has been margin based. While there is nothing wrong with this conceptually, it does create an interesting dynamic. Merchandise is the cash cow for these companies. Without this, many of the companies will fail. There is an underlying need to get people “into the warehouse.” When I started my career (many eons ago) I was naive enough to think that when I was hired on at one of these incentive companies that I was going to work for a consulting firm that was trying to find the best way to motivate and engage employees. What I found out was they were all for that – as long as the way to do motivate and engage led through the warehouse (I’m exaggerating a little here for emphasis, but there was an underlying culture of this).
While that culture has shifted slightly over the years, it is still present in the industry. If Amazon was going to be able to undercut prices because of their buying power – then incentive companies were going to be forced to change their model. This would mean finding other ways to make money – which would lead them to finding other ways to increase motivation. The benefit would have been that these companies would have created a larger toolbox with more tools and thus not fall to the old idiom “when you only have a hammer, every problem looks like a nail.” This would mean better solutions to motivation problems.
The next competitor
While Amazon might be leaving, they showed that there was a desire in the marketplace for something like this. I don’t think there is another company right now that could fill that role, but that doesn’t mean in the future there couldn’t be. So, with that in mind, it is important to think about the next game. What will this mean for the traditional incentive houses, for the mid or small sized performance improvement firms? Will someone take that bold step to change the game and bring in a different set of plays and players or will they exhale a deep breathe, thankful the other team forfeited, and go back to their old ways of playing? Right now, we’ll just have to wait and see…
Please share your thoughts and rants on this…would love to get a nice dialogue going.
Kurt
If you know someone that might benefit from this article pay it forward and pass it along.
This is a great video that highlights some key things that companies can do to engage their employees. Love its fun presentation. I would add in there are some other aspects beyond the three that this video talks about that can help engage participants (look to enhance bonding, building challenge and comprehension into the work environment, and creating an organizational culture that you would want to defend) – but these suggestions are a great start!
Ariely talks about the difference between a social and economic contract. Very important to understand when we are thinking about motivation and how we drive this at work.
I poised the following question to an on-line professional sales group that I’m a member of:
“What type of short term sales incentive rewards work best? I was wondering what people in the group thought were the best types of short term incentive rewards? Research shows that most people will tend to pick cash but that performance actually is better with non-cash rewards (trips, merchandise, etc…). What are your experiences with this – have you seen a difference in sales results with different types of rewards?” Within 24 hours I had received 45 responses. I summarized those 45 responses and created the following summary that I presented back to them. I thought that this might be interesting post for this blog as well… here is my summary:
Thanks everyone for such great input on this question. Your responses have definitely provided some great insight into what makes an effective short-term incentive. I will attempt to summarize the 45 posts on this so far and would love more feedback in case I’ve missed something.
In general, it appears that most respondents felt that cash is a key part of the overall compensation, but that it is probably NOT the best medium for a short-term program. There is a strong preference for non-cash and recognition type of rewards. As Greg D put it, “Recognition drives as much healthy sales will as money.” As indicated in the question itself, research has shown that non-cash awards typically outperform cash awards in the same incentive program. The general gist from the responses so far seems to support that finding. Dick O said it best when he said, “I can’t remember all of that cash that I’ve won. ..I’ll tell you though, that I remember each time I was recognized.”
There was also a significant emphasis on not having a “one-size fits all” approach and to create individual incentives whenever possible. Dana W summarizes this feeling with “No one incentive is going to work for all people.” Another aspect that was discussed was bringing in others (spouse, family) to the reward. These types of rewards were thought by some to provide “extra” incentive to earn them. Allowing sales person input into the actual award was also mentioned.
A key component to this all was brought up by Tim M and Tom F – that the structure of the incentive is as important or more important than the type of reward offered. On this I would have to agree. In my experience, how the program rules are structured, who is eligible to win (or more importantly believe that they can win), the timing of the incentive, and how results are measured are going to make or break any program. As Tim stated, “…the type of reward has less to do with the success or failure of a contest or incentive than the STRUCTURE and TIMING of the incentive.”
Thanks to everyone for their input – I’d love to have more discussion on this and how incentives can be structured to be more effective moving forward. On an end note, just some of the fun reward offerings that I found interesting: bottle of wine and dinner, time off, give to charitable foundation, becoming a member of a special “club.”
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.
There has been a significant amount of research on the merits of intrinsic versus extrinsic motivation (see Eisenberger, Deci, Ryan, Locke, Latham, Kohn, and now Dan Pink…). Both sides of the controversy claim that their favored motivational drive is best. In my opinion, they are both barking up the wrong tree.
It has been shown empirically that both types of motivation drive behavior. In the real world, both extrinsic and intrinsic motivations are utilized in almost all work situations. I don’t know of any work place that doesn’t provide employees with some type of pay and most have some sort of variable pay. I also don’t know of a workplace where there isn’t a focus on (or at least lip service to) improving how jobs are structured for greater engagement or how leaders can inspire their employees. However, the real discussion should be on how to leverage both forms of motivation to get the behavior change that is needed.
The main issue in this debate focuses around the general impact that extrinsic reward has on intrinsic motivation. Both sides of the debate admit that in certain circumstances extrinsic rewards can either have a detrimental or positive impact on intrinsic motivation. The issue that businesses face is how to create incentives that not only drive immediate performance but also have a positive influence on intrinsic motivation. The discussion needs to be not on an either/or type scenario, but on how do we leverage the power of both.
We believe we know what gets us up in the morning and rearing to go – don’t we? If someone asked you what motivates you, you would be able to tell them – right? Our ability to reflect on our own motivations is a belief that we all think we do well. I would argue that we are fooling ourselves and we really aren’t as good at it as we think.
Case in point, research has continually shown that when asked what type of reward employees think would be most motivating or that they would most want, they choose “cash.” Our own research shows that when asked, 70% to 80% of employees typically listed cash as the top reward. However, when you actually look at studies that show performance lift, non-cash awards have a greater impact. Dr. Dan Ariely, the author of Predictably Irrational recently blogged about this (See http://www.predictablyirrational.com). He cites an experiment done with Goodyear Tire company in which non-cash rewards improved performance more than double what the cash rewards did. In fact, there are numerous studies that support this idea.
So how can it be that if asked most people would state they prefer cash incentives but perform better when offered non-cash incentives? Part of the reason is because we don’t really understand what drives us? Cash is easy. We understand it. Economists point out that cash has “utility” – in other words it can be used to purchase any number of items that we desire. Non-cash is not so simple. We might not like the choices we have or feel limited by the selection. So what gives?
Dr. Scott Jeffrey’s has done much work on understanding this phenomena (see http://www.incentivecentral.org/awards/whitepapers/benefits_of_tangible_non_monetary_incentives.1830.html). Much of it comes down to how we evaluate, separate, justify and are socially reinforced by each incentive. In other words, we evaluate the value of cash and non-cash differently resulting in a higher value placed on non-cash elements do to affective factors (we can visualize ourselves with a new 56” TV and that gives us a good feeling – this is one step removed with cash). We also tend to lump cash bonuses in with our paycheck and it isn’t seen a separate, special reward. We have to justify spending our cash awards on luxury items such as the above mentioned TV instead of paying down the mortgage – not so when we are only offered luxury items. And finally we tend to not talk about the cash we earn to our peers and friends – but we do tend to talk about that new TV (or trip to Hawaii, or new Golf Clubs, etc…) and are socially reinforced by the bragging rights of those conversations.
So back to the initial question of understanding our motivations – we can see that there is much more to the story than asking people what motivates them. The fact is we don’t always consciously know what motivates us (think Freud). So while asking your employees what they want is a good first step, make sure it isn’t your only step. You need to dig a little deeper to get at their underlying drives.
Do you know how you are compensated for the work that you do?
You may be surprised that there are many employees who have little understanding of how they are compensated for their work. How can that be possible? Aren’t employees motivated by money? If this is true, then why would they not know how to squeeze every penny out of their compensation plan and maximize it?
Over the last year, I have interviewed approximately 50 individuals soliciting feedback about their incentive compensation plan. Surprisingly, even though the industries and compensation plans were different, the interviewees stated similar concerns about how they were compensated for their work.
Here is a snapshot of some of the responses:
Interviewees did not fully understand how they earned with their compensation plan
The compensation plan was too complex
The compensation plan was not communicated or trained effectively
The compensation plan components did not reflect actual job duties in the field
The above concerns can lead to an unmotivated workforce which can turn into organizational or departmental goals being unmet. There is little room for error in today’s economy because it may determine the success or demise of an organization.
In this new economy, effective and aligned compensation plans can be an effective tool for harnessing individual, team, and organizational success.
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.
