Sales professionals are self-motivated, highly driven employees who develop their own strategies to win new deals and reach quotas. They are also extremely diverse in terms of ethnicity, age, education, relationship status, and other key demographics. So why do most companies give them one-size-fits-all incentive plans?
Past research has demonstrated that sales staff are motivated differently, with studies showing that some are motivated by high incentive levels, whereas others prefer a lower variable-to-fixed compensation ratio. However, firms don’t have the capability of customizing incentive programs on a case-by-case basis.
Our research team hypothesized that empowering sales staff to select their own incentives from a menu of options would yield better outcomes than assigning incentives. Our hypothesis is based in goal-setting theory, which has found that providing individuals with challenging, but achievable goals has a positive impact on their goal commitment if it meets three key criteria. The criteria are that: 1) individuals anticipate success (expectation); 2) they are involved in determining the goal (participation); and 3) they are working towards an all-or-nothing goal where the reward is only granted when the target is achieved (attainment).
We conducted two field experiments at two Fortune 500 companies to test our predictions, studying sales managers at a major automobile manufacturer and sales people at call centers at a Fortune 500 telecommunications firm. At each company, the first group of sales professionals selected an incentive from among three options, whereas a second control group worked under their regular incentive plan. Two final online experiments explored the relative importance of the three goal-setting criteria.
For instance, in our self-selection scheme, employees could be asked to choose a goal of achieving a 5%, 12.5%, or 20% improvement over their sales baseline to receive a reward of $1,000, $2,000, or $4,000, respectively. The scheme is therefore designed to meet the three criteria of goal-setting: expectation, participation, and attainment. The sales baseline could be calculated as the average of the individual’s sales performance over the past three periods.
This self-selection scheme differed in three important ways from typical quota systems: 1) sales staff received challenging but achievable customized goal-reward combinations based on their individual baseline sales; 2) sales staff got to choose their own goal-reward combination from a preset menu of three options; and 3) staff only received their reward if they achieved their goal.
Here’s what we found:
- Sales employees’ performance shot up by 25% when they were allowed to pick their own incentives as compared to equivalent quota systems.
- The employees who showed the most dramatic improvements were those who had had highly variable or low performance in the past.
- The ability to self-select incentives provided ongoing performance gains if the program continued multiple times and didn’t immediately disappear when discontinued.
With unemployment at a record low, competition for talent is fiercer than ever. Novel incentive systems, such as the self-selected incentive scheme, could take a key role in attracting, retaining, and motivating the talents in your sales force. In this new self-selection scheme, providing a limited amount of options gives employees choice and voice, while also motivating them for higher results.
From: Raghu Bommaraju and Sebastian Hohenberg, “Self-Selected Sales Incentives: Evidence of their Effectiveness, Persistence, Durability, and Underlying Mechanisms,” Journal of Marketing, 82 (September).
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Raghu Bommaraju is Assistant Professor of Marketing, Ivey College of Business, Iowa State University.
Sebastian Hohenberg is Assistant Professor of Marketing, McCombs School of Business, University of Texas at Austin.