Is Your Sales Force Addicted To Incentives?

Published:2011-07-12    Source:Huaran Consulting

A distribution company pays its salespeople entirely though commissions on sales. The philosophy is "you eat what you kill." Salespeople keep their accounts permanently after making a sale. Many tenured salespeople earn several hundred thousand dollars a year, mostly by selling to long-time customers who provide a continuous and stable source of revenue and income. These veterans are basically order-takers who feel no urgency to develop new business. Yet as market growth slows, the company can't attract and retain new salespeople because it's too hard to build a sufficient book of business to earn a living. Annual salesforce turnover is 57%. Sales leaders want to realign accounts more equitably across salespeople to give newer salespeople a better chance to succeed while providing customers with better service. But they fear this will anger top earners and prompt them to leave and take business with them.

     Having a highly leveraged pay plan (i.e. less salary and more incentive pay in the form of commissions or bonuses) is not necessarily a bad idea. Executives who receive stock options as part of their compensation have a vested interest in making their companies stronger and more competitive in the long run. What is troubling about the vast majority of sales force incentives, however, is that they are tied to short-term, individual, results-focused metrics (e.g. monthly territory sales). These metrics can discourage teamwork and distract salespeople from focusing on what is required to develop sustainable customer relationships while driving new business and long-term success.

     There is a rational argument for using incentives in sales forces. Salespeople drive the top line. If the company can track sales by salesperson, then incentives enable a "pay for performance" philosophy in which salespeople's earnings reflect the value they generate.
Most company leaders will argue that sales force incentives have benefits, yet too often, incentives create more problems than solutions. They can lead to inappropriate, self-serving sales force behaviors, incredible short-term focus, and a counterproductive culture that hurts customer satisfaction and company performance. Consider several examples.

• In the medical device industry, incentives are a large part of salesforce pay. Many salespeople feel little loyalty to the company they sell for, as money becomes the primary basis for their relationship with their employer. Salespeople jump ship when a competitor makes a better offer and they take many customers with them. When two strong district managers at one company left for a competitor, they took all of the salespeople who reported to them along with them.
• A technology company had a breakthrough new product, but missed out on a significant opportunity when it couldn't implement a planned salesforce expansion because several top performers in the company's commissioned salesforce threatened to leave if they had to give up accounts (and therefore commission opportunity) to expansion territories.
• In the early 1990s, Sears paid the employees of its automotive repair division a commission on the parts and services they sold to customers. Although clearly unethical, many employees began charging customers for unnecessary work. Several lawsuits ensued, and Sears had to pay out millions to consumers who felt they had been enticed into paying for needless repairs. In the wake of the scandal, Sears abolished the commissions.

     Too frequently, sales leaders turn to incentives as a quick fix, while overlooking the power that other salesforce decisions and programs have to influence salespeople, their activities, and consequently drive results. Incentives are just one of many salesforce effectiveness drivers. Too many sales forces today live in the Incentive World (on the left side in the figure below), where leaders view incentives as the primary way to motivate and control a sales force. Most salesforces will be more effective in a Balanced World (right side of the figure) where incentives are just one component of a comprehensive program for influencing salespeople and their activities.

     Overreliance on incentives to motivate and manage salespeople no longer works, given the complexities of today's selling environment. Incentives are at best a partial solution to most of the challenges that sales forces face. By breaking the incentive addiction and developing a more balanced sales management approach, companies can build a healthier culture, create stronger customer relationships, and achieve better long-term results.