Stanford research shows that sales grow when bonuses are eliminated

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 Professors Nair and Misra, the benefits can be significant – in one case stimulating a 9% uplift in revenues.

As 2010 approaches, that sort of sales uplift could make the difference between achieving your revenue goals for the year - or falling short.  It’s a powerful argument for reviewing your sales compensation plans now, so that you’re ready for the new business year with a set of principles that can optimise your sales performance.

If you’ve run a sales force for any length of time, you’ll probably be familiar with the principle that compensation drives behaviour.  As Nair and Misra point out, quota bonuses can result in sales people gaming 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.

Removing these quota-related bonuses can help to remove the inefficiencies caused by the sales people’s attempts to game the system.  In the example quoted in the research, they worked with an organisation to redefine their compensation plans for FY2009.  The results were impressive - the new structure resulted in a 9% improvement in revenues, translating to an additional $1m a month.  What’s more, the new plan proved extremely popular with the sales people.

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, modelling the desired outcomes, and tuning the compensation plan accordingly.  

Most organisations want their sales force to be encouraged to maximise profitable revenue, and to do so as early in the business cycle as possible so that end-of-quarter and end-of-year surprises can be eliminated.  This can be achieved through careful design of targets and accelerators.  Similar principles can apply to incentivising certain elements of the product mix.

As the end of the sales year approaches and you prepare to hit the ground running from the very start of 2010, I suggest you reflect on how well your current sales compensation plans stimulated the desired sales behaviour.  Even if you did well, is there room for improvement?  And if it looks as if you may end the year short of your original goals, how can you change the situation for next year?

An external perspective may help.  We’ve worked with a number of clients to help them structure and tune sales compensation plans that drive the desired outcomes, and eliminate the opportunity for sales people to game the system.  Drop me a line at bob.apollo@inflexion-point.com if you would like to learn more.

Getting it right is worth it.  On average, organisations spend more than three times as much on sales compensation as they do on advertising.  Careful planning can make sure that the money is well spent.