It's an old adage that compensation drives behaviour - but sometimes incentives can have unexpected and undesirable effects. Recent research from the Stanford University Graduate School of Business
suggests that companies that eliminate bonuses for achieving sales
quotas generate more revenues. According to Stanford,
the benefits can be significant – in one case stimulating a 9% uplift
in revenues.
As Stanford's research points out, poorly designed bonuses can result in sales
people manipulating the process. If they have already made their quota for
the period they may defer or “sandbag” deals, whilst sales people who
see no chance of achieving their quota may instead defer their efforts
to the next period.
In the case quoted by Stanford, removing these quota-related bonuses helped
to avoid the inefficiencies caused by the sales people’s attempts to
manipulate the compensation plan. They worked
with the organisation to model and redefine their compensation plans, with impressive results - the new structure resulted in a 9%
increase in revenues and proved extremely popular with both management and the sales
people.
Establishing "Appropriate Behaviour"
Of course, removing quota-based bonuses may not be the
answer in every situation - but the research draws our attention to the
need to carefully define the desired sales behaviour, model the
desired outcomes, and tune the structure of the compensation plan accordingly.
It's important to take the market environment into account: the principles of sales compensation planning need to reflect the product and market lifecycle - and incentivise different behaviours between startup, rapid growth and market maturity. The emphasis may need evolve from new customer acquisition to customer retention and development - but always needs to reflect the behaviour that is greatest value to the organisation at the time.
SMART objectives
Whilst the objectives upon which compensation is based may evolve over time, they must always be based on SMART principles - Specific, Measurable, Actionable, Realistic and Timely. The rewards associated with each objective need to be proportionate to their value to the organisation, taking both the immediate period and the long-term into consideration.
Outcomes vs. Activities
Compensation plans generally need to be biased towards outcomes, rather than activities. Marketing compensation is a classic example. We're strongly in favour of performance-based incentives for marketers - but the goals need to support the greater good. For example, we've found that marketing compensation plans that focus on the number of leads generated at the expense of quality are alomost always dysfunctional.
These sort of schemes can result in large volumes of poorly qualified leads being generated, without regard to their contribution to revenue and profit. Far better to compensate marketers on measures that have a closer relationship to revenue and profit - for example, number of opportunities acceptedby sales, value of pipeline and/or value of closed sales.
Recommendations
- Compensate marketing teams according to the sales value generated from their efforts
- Avoid compensating marketers on raw activity levels, such as mumber of leads generated
- Structure sales compensation plans so as to encourage sales people to get above target and stay there
- Ensure that all compensation plans truly reflect the behaviours that support the company's goals
- Reward activity that makes money for the company, now and into the future
- Tie incentives to the achievement of breakthrough goals for the company
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and see for yourself how your organisation compares to some of the best
in breed? We can't guarantee that completing the checklist will give
you all the answers, but we think that it will at least help you to ask
the right questions!
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