Sales incentive programs and rewards programs are essential for all businesses that operate outbound channels for customer acquisition. They can encourage certain behaviors and, if they are poorly designed, could lead to unintended results and conflicting interests. Making a comprehensive plan that encourages positive corporate conduct is a skill that can bring immense advantages.
In a famous article written by Alfie Kohn of HBR in the 90s in the 1990s, it was stated that sales incentive programs, including commissions and bonuses, would never be successful in the workplace, the idea that they alter behavior in the short-term and lead to an attitude in which the primary purpose is to reap the reward as opposed to a commitment to the long-term goal of achieving sustainable outcomes.
While I usually believe this to be the case, I do think and will prove through this essay that the redundant nature of incentive schemes for sales is a claim that should not be taken as a fact. Like everything else in life, the issue isn’t always as simple or white as it appears. The fact that the business world isn’t taking Kohn’s advice indicates that incentive programs create value for some organizations, and for that reason, my focus ointhis area is to examine ways to improve and tweak these programs continuously.
In my time, I’ve seen the impact that sales-incentive programs have on accelerating growth in an organization. An example that will be used throughout this piece will be my own experience with a company in Croatia and a case of a poorly designed program, and subsequent review led me to the idea for this piece.
At any given moment, 68% of salespeople are searching for an opportunity to work elsewhere. That is a clear indication of the importance of rewarding salespeople, whether to motivate those who are the most successful to stay or to reduce the chance of failure for other people.
Example of a Reward Scheme That Destroyed Value
The company I worked for wanted to inspire its sales team to boost the revenue from sales for its divisions (a quite common and standard request). But, in doing so, it only set one easy measure of effectiveness: the absolute number of sales (volume in units that were sold). This measurement, in fact, included all the elements that could (in most situations) be a reliable performance indicator since it:
But there was a problem. When assigning this measure to the sales force, nothing was designated as a measure of performance to the product department, which was responsible for setting the prices. It was also the department that was responsible for another aspect of the equation, namely margins and, consequently, the bulk of the profits that the sales units.
What happened was that skillful salespeople were able to convince department employees to alter prices to suit their needs. While the team responsible for the product was diligent and didn’t necessarily adjust prices automatically whenever they were asked several times, they did. The result was that the volume of sales (and therefore revenue) was soaring after the campaign started during Week 9, mostly due to the reduction in prices that resulted in operating losses. The graphs below illustrate the way in which the performances of profit and sales dramatically changed.
Since salespeople were the sole team with a tangible reward, The majority of the business was sometimes oblivious, or even ignorant, of these objectives. This led to an imbalance in the performance of the team due to perverse behavior changes like salespeople who concentrated more on convincing the product team to lower prices rather than the actual effort of convincing customers to purchase items at normal prices.
How the Scheme Was Fixed
It took only a few minutes for the management to realize that things weren’t running according to plan. Many of us are taught in the business school:
It’s vanity to talk about market shares. Profit is rational, but it’s the cash flow that we have to confront reality.
“Reality” hit my company very quickly when the company realized it wasn’t earning enough profit from these huge units of sales. The expenses grew, and eventually, to the point where cash shortages began to develop.
Management was of the opinion that a measure that was firmly and solely dependent on sales staff (sales volume) affected the overall value of the business (see the image below) because the goals of the organization were not considered holistic and aligned, in addition to the underlying impact of a binary reward system.
To address the issue, management introduced margin as a performance indicator for the department responsible for product and helped “put out the fire,” which was causing the losses. The company began to have an incentive plan and would not alter prices unless they could be certain that sales volume and absolute margins would grow. This made the whole incentive system more complex and effective. Product and sales must cooperate, and any short-term tricks will result in a zero-sum game both sides would not want to concede.
The Lessons Learned
The two examples above showed us that the efforts to implement rewards programs in an organization aren’t easy, and they are not something that can be implemented sporadically. To be successful, the schemes should consider all financial aspects and be linked to every department and team within the organization in order to be truly value generators. Sometimes, even entities outside of the orbit of the business should be considered, for instance, downstream suppliers and commercial partners.
