Sales is a critical function of any company in some shape or form – but at a time when corporate budgets are being slashed around the world, motivating sales teams can become a challenge. First of all, many companies may be scaling back bonus options, while at the same time, clients may be less inclined to spend money.
Those two factors also mean that companies also may need to work harder to build the perfect compensation mix – one both efficient and rewarding – to ensure sales teams are motivated to be highly productive, especially in the uncertain economic climate.
A working paper by Doug J. Chung, Harvard Business School; Thomas Steenburgh. Darden Graduate School of Business; and K. Sudhir, Yale School of Management purports to determine the right mix of bonuses, commissions, and quotas to keep sales teams motivated. The paper, “Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans,” [PDF] finds that all of these motivators can work together in the compensation tool box. They summarize:
“We find evidence that: (1) bonuses enhance productivity across all segments; (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas; and (3) quarterly bonuses help improve performance of the weak performers by serving as pacers to keep the sales force on track to achieve their annual sales quotas.”
By mixing compensation options, companies can better motivate a broad range of sales staff to achieve high performance goals in the long term.
The researchers studied the sales force of a “highly regarded multinational Fortune 500 company that sells durable office products” for three years. They suggest that salary, commissions, bonuses, and quotas as important factors in building the perfect compensation plan, and leaving out any of these factors could demotivate staff.
The problem starts with quotas – companies want to ensure sales people are meeting a basic sales floor so they set quotas for people to meet. But a simple quota-based performance plan could demotivate high-achievers to only meet the bare minimum, they explain. To remedy this, companies should also provide quarterly bonuses. They explain, “our empirical analysis shows support for the role of the quota and bonus as a motivational goal and stretch incentives respectively.”
Similarly, companies will want to raise quotas over time in order to improve year-over-year performance, but in a way, this penalizes hard work – sales success will only result in a higher target next time.
In order to reduce the potential for quotas to demotivate staff in the long term, they suggest rasing quotas based on team outcomes, rather than individual success. “To avoid such adverse
impact on sales, the quota adjustment year over year was done only based on group performance,
where each individual’s current performance would have minimal direct impact on their future quota.”
Setting up a quarterly bonus/quota system can help sales teams better measure their success working toward an annual goal, continue Chung, Steenburgh, and Sudhir.
“In the absence of quarterly bonuses, failure in the early periods to accomplish targets caused agents to fall behind more often than in the presence of quarterly bonuses. Thus, quarterly bonus serves as a valuable sub-goal which helps the sales force stay on track in achieving their overall goal; they are especially valuable to low performers.”
And finally, the researchers add that in addition to bonuses tied to quotas, companies should implement overachievement commissions to encourage staff to go above and beyond in the long term. They suggest, “…overachievement commissions increase performance among the highest performers.”
“We find that the quota-bonus scheme used by this firm increases performance of the sales force by serving as intermediary goals and pushing employees to meet targets. Features such as overachievement compensation reduce the problems associated with sales agents slacking off when they get close to achieving their quota. Further, quarterly bonuses serve as a continuous evaluation scheme to keep sales agents within striking distance of their annual quotas.”
By combining various compensation tools, companies can better motivate sales teams to perform at their highest abilities. The mix provides checks and balances for sales people to work toward continual improvement.