When a company's sales numbers lag, its sales executives often blame the compensation package and take steps to change the way they reward their sales employees. In the meantime, finance executives view sales force compensation as a major expense and institute controls to keep costs at what they feel are safe levels. What is the best way to motivate a sales team while addressing the concerns of both sales and finance leaders?
Darden professor and researcher Thomas Steenburgh finds that "mixing it up" can match sales people with the compensation packages that best suit their selling styles and won't break the bank.
According to an article Steenburgh co-published with University of Houston Professor Michael Ahearne, sales people can be divided into three categories: laggards, core performers and stars. When companies incentivize their sales team members according to the category to which they belong, they reap financial benefits.
Steenburgh and Ahearne explain a series of experiments they conducted in "Motivating Salespeople: What Really Works," which appears in the July-August edition of the Harvard Business Review.
"Sales teams are not homogenous groups. They are made up of individuals with different levels of motivation and who care about different things," Steenburgh said. "If companies tailor their incentive programs in ways that recognize these individual needs, then they will get the most out of a wider spectrum of sales employees."
According to their research, core performers tend to be the largest group on company sales teams, but company managers often ignore them. This is because sales managers tend to be former sales stars and they identify mainly with other sales stars. As a result, they tend to overlook core performers for promotions or other accolades. According to Steenburgh, companies do this at their own peril.
"Core performers can't make their numbers if they aren't in the game," he said. "They get the least amount of attention, yet they are the most likely to move the needle if given the appropriate set of incentives."
An experiment conducted by Ahearne showed that core performers thrive by having multi-tiered targets. For this incentive structure, a tier one sales target is set to an amount met easily by core performers. The second tier was at an amount reached by a smaller percentage of core performers and the third tier was set for an amount typically reached by star sales performers. Agents at a firm were divided into two groups. The first group was assigned to tiers one and three. The second group was assigned to all three tiers. As expected, the tiered system provided steppingstones that motivated core performers in the triple tier group to reach for a higher sales level. Multiple tiers did not have the same effect for laggards or stars.
So what pushes these two extreme groups to boost their sales efforts?
Steenburgh conducted a study that examined the role that bonuses play in motivating sales workers. For laggards, he found that pacing is the motivational key. During his examination of field data from a Fortune 500 company, Steenburgh could predict that sales workers in the laggards group would fall in performance if quarterly bonuses were taken away in favor of annual bonuses. Measures of the revenues laggards generated showed a dip by approximately 10 percent. Core and star performers also saw a decline in their sales numbers. Steenburgh concluded that periodic incentives are more helpful for laggards to keep them on track – a phenomenon also observed in education among poor performing students working to improve – and it maintains the performances of cores and stars.
Steenburgh and Ahearne are also working on a study that shows how new people added to a sales workforce can put pressure on existing sales team members. Referred to as the "man on the bench effect," in which benched players put pressure on starting players to perform well in order to stay in the game, Steenburgh and Ahearne observed that sales people working on teams with "bench players" performed better than teams without other players waiting on the sidelines.
The final players – the sales team stars – are often the targets of finance departments seeking to cap commission rates and control costs. According to Steenburgh, this approach is unwise. "Capping sales commissions just when star sales employees are on a roll encourages them to call it quits once their targets are met," Steenburgh said. He compares the behavior to New York City cab drivers who stopped picking up riders, even during high-demand periods, after they met their passenger goal for the day. Instead of placing caps on commissions, Steenburgh's study shows that companies should provide overachievement commissions, which are rates that kick in after sales targets have been met. According to Steenburgh, this keeps star sales people in the game longer, which is important because the fourth quarter is often when customers are most likely to buy. "Ultimately, this helps a company's bottom line," Steenburgh added.
Before applying these evidence-based techniques in their own firms, Steenburgh encourages executives to take stock of their sales force and do a little detective work of their own. To understand if their sales force follows the typical performance curve of laggards, core performers and stars, Steenburgh recommends calculating each employee's sales performance against sales targets and looking for patterns to determine the company's sales force makeup. Instead of implementing complete overhauls, executives should focus on smaller segments of their company's compensation plan and design a pilot program for each segment.
"Evidence – not assumptions – is what executives need in order to choose the best approaches for motivating their sales employees," Steenburgh said.
Steenburgh is a member of Darden's marketing area. "Carrots and Sticks" and "Allocating Marketing Resources" are the series names for his two lines of research. His articles have been published in Management Science, the Journal of Marketing, Marketing Science and the Journal of Marketing Research.
Source: University of Virginia's Darden School of Business, Newswise
admin 02 Aug, 2012
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