Is a question asked over and over by pretty much everyone in this and other businesses, but it is especially important in workers’ comp services, where companies and sales people are fighting over what’s been a shrinking pie for years.
And, except in Florida and Texas, that pie will continue to shrink.
New research provides pretty compelling insights into what works, what doesn’t, and why.
Caution – this is ONE study, in a very different culture, of a in a company selling tangible products.
The high-level takeaway…Sales force compensation is a tricky issue, requiring decisions based less on intuition and conventional “wisdom,” and more on hard, quantitative data.
Details (paraphrasing here…)
Salespeople were assigned to groups each with different compensation arrangements. Some people received unconditional bonuses, which were given irrespective of their sales performance. Some received “conditional” bonuses, where compensation was tied to sales quotas under three different treatments: standard, punitive, and real-punitive. In the standard treatment, a salesperson was paid a bonus after achieving 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And in the real-punitive treatment, a draw system was used, where payments were made at the start of the week but then withdrawn for those who didn’t meet their quotas.
For the unconditional bonuses, the thinking was these would encourage reciprocity; Salespeople would work harder in appreciation for the firm rewarding them with higher pay. 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 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.
Perhaps not surprisingly, the conditional bonuses were, on average, more than twice as effective as the unconditional bonuses… they increased sales by an average of 24%.
But it’s not that simple.
The researchers found 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.
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.
Conditional bonuses were equally effective across all types of performers.
What does this mean for you?
Experiment with different approaches. Avoid basing decisions on your gut; rely instead on data.