Admit it, sales suck without incentives! Nobody will be motivated to work for free. A sales incentive is a necessary evil. But, choosing the right strategy will cut the lethargy and slackness in your teams, and drastically improve their performance of by many folds. When you start paying out a lucrative number as performance bonus, people get motivated, but over time faced with certain types of incentives, some are tempted to make up or misrepresent their performance numbers.
Often employees, especially in sales have very little regard to company regulations, and thanks to travel, an escape from their reality and whatever ways they would like to payback as an apology for consuming their one-third of lives. However hard a sales manager tries, he/she can't bring people with independent attitudes to get sales done. The level of compliance in sales is often patchy and does not depend solely on mechanisms that you use to make your salesforce comply.
But often, any intent to defeat the system or tweak not just happens in the bottom-line. Few companies planning on increasing their valuation and get more funding rounds to fudge their numbers, or encourage wrong accounting practices. But what explains this paradox? Here's a detailed review how Game Theory works with 3 systems. Read on...
It’s the goal that defines compensation for sales and production. “Sales reps who close more than 4 accounts this year will get a $X in the bonus” Anyone who doesn't close just one account or less, misses on the goal and loses out the bonus. This will allow people to exploit the system by fudging the numbers on this incentive as one gets close to the target. Its a classic story on how a dairy farmer started adding water each day to his milk and continued doing so till a day when he added milk to water. Avoid!
When one compares cheating under target-based compensation with cheating under non-performance-based compensation, which offers "no financial incentive" to cheat, people less are tempted to work for free! Nobody wants to work for free. The results suggest that cheating as a response to sales incentives can be made less severe without giving up performance pay altogether which may have led to many ethical dilemmas.
Tournament-style bonuses are almost the same as target-based, except the bonus is a “jump” at a particular level. The difference is are based on relative performance. The goal is relative to other employees rather than a specific sales number. “Top 30% of closers this year will get a $X bonus” Although, its certainly an incentive to cheat in performance, it’s harder. Moreover, a tournament compensation system based on relative performance also results in significantly less cheating than a target-based scheme.
This competition is not between sales executives and the employer. Each competing with each other to win as much money as they can. And, it is fair to assume that all of them will act in self-interest. If two sales representatives forgo their sales accounts, they have two strategies – close 4 accounts, or do not sell at all. If one them sells and the other doesn't, the one who does walks away with a hefty bonus.
If both of them sell, then each gets half the bonus salary. If none of them do, they get nothing at all. Making the team participate improves cohesion. The better strategy for the salesforce in this model is to dominate the top 30% – picking up their phones, do cold calling and work on their sales numbers, rather sit and slack devising ways to game the system. Every sales representative would tend to play their best strategy in hopes to reach middle of the curve.
Sales personnel who achieve their targets do not know if they have produced enough bonus without cheating. Many companies adopt this in sales and production, and its successful by coupling the incentive program, with an independent performance management system. In spite of each earning only $X bonus payouts every month, they would be forced to continue showing more sales.
If anyone doesn't participate, they will gain nothing while others will share what they gave up. In the end, if only one person meets the target, the sales representative will earn all of $X in cash!
Linear Pay for Performance
The pay structure is graduated, unlike a target-based or tournament-style payout structure. Linear pay for performance system is different and more graduated – “Each sale will be rewarded with a $X bonus”. There is incentive here for salesforce to game the system, often lie or fudge their numbers, as each misrepresented sale is a loss. This structure does not focus on a single point as in other bonus structures. Linear pay forces people to be rewarded in direct proportion to their productivity.
Linear structures encourage openness, transparency, and more honesty and rewards based on work. None would resist the temptation to cook up the books and lie in this payout. The more you work, the greater the pay. But, there exist incentives to exaggerate one's performance. What if your sales manager pays you $200 for every 5th sale you make for the day? As a sales development representative, have you closed a sale for a large bonus?
A lot of organizations structure their sales/production bonuses differently. Each one operates on their recipes for payouts, but as an employer do you pay your salesforce to cheat? Compensations may create opportunities that tempt employees to cheat. A few sales representatives may claim they closed 2 accounts one fine Thursday, and eagerly cashes his bonus payout the weekend, and returns Monday to apologize it was a bad lead, or the client backed-out and a bee-line of excuses. Such exaggerated claims could damage a startup's sales or a factory's production planning process just because a few enterprising salesmen wanted to cash their bonus early.
Most companies have found even linear incentives don't help much with sales. The incentive program will lead to sales executives earning only $X per month, which sometimes is grossly inadequate. If everyone earned $X every month, there is no significant difference in the sales efforts of SalesRep1, and SalesRepN. And, when everyone is paid equally, there is no competition or drive to sell more! If you are evaluated the same way in sales, its obvious why your performance appraisals sucks. Target-based performance is an absolute measure, while Tournament-style is a relative goal which makes everyone participate.
Working in sales, its often noted with employees cheat when others cheat. They play the game when others play it hard. They sell when their bonuses are linked to how much they collectively sell. The pioneering teams could not have achieved any of it alone. If you devise a strategy that helps earn a bonus payout as a grand reward of $10,000, over a regular $200 per month, one can expect a fiery competitive sales closers to work well within a deadline. Team cohesion builds with motivation. Its a no-brainer that a motivated salesforce wanting to grab the big chunk of commission will work faster.
This post would have been a click bait and grossing on top-read listicles if the title had been something like "How I Make $21,000 a Month" or "Read how you can earn $50,000 with this simple trick!" A fancy 5-figure perhaps does catch the eye of the any human sane enough to work for profits. Enough said, numbers matter a lot in every walk of life. Everyone asks for it. When it comes to bonus payouts, most work as “rational cheaters”, blinded by quick money, perhaps motivated by conscience or guilt to tweak an existing model to gain more incentives.
Being Intuitive Vs Analytical
Many companies budget the incentive based on history. If a particular team is good at selling several products/services, they give them a linear incentive pay by allocating them $X each. But, let's assume you have 20 sales development representatives on your payroll, and if given an opportunity to experiment, you could drive the caliber of your sales teams by offering 20x the compensation for the top 30% sales closers, will that make them work hard? If your regular incentive was $500 per sales representative, you can announce a tournament that pays $3,000 for the top 30% closers which will make 20 SDRs compete on skill-based participation. To put it in plain speak, its more about survival in the sales game unlike getting lucky by counting cards.
A study based on this theory has claimed to work a way to figure the "measure of cheating" when people were asked to work on all 3 styles of sales challenges. It records a significant rise in an urge to tweak or game the system, as much as 2.5 times in target-based compensation systems when compared with a linear and tournament-based bonus system. The results of the exercise proved that target-based compensation produced significantly more cheating than either of LPR or TBS.
In sales, competition is a valuable asset. It drives to catalyze growth and often influenced by various factors. As a sales manager, you should discern when competition helps and when they do not. Few models work best for large competing sales teams and rapidly expand their markets. Competition helps sales evolve and segment your salesforce more quickly than in the hands of an effective sales manager and incumbents any opportunity for slackers to position themselves, or defect a tried and tested model. Competition will be the essence of strategy in such fluid situations and people will continue delivering not just for the money.
However, don't just be blinded by models. There are a lot of possibilities that apply in reality which make any model look obsolete, thanks to Game theory. The possibilities of tweaking an existing system are many but however every incentive schemes are carefully designed puzzles. Others gain at your expense if one tends to be slack! Everyone sells, and everyone gains a little, maybe not enough. It's a practical way of how game theory can help with devising strategies for each sales bonus payouts. Astute sales strategists can proactively instigate how to build team cohesion with the right mix of payout systems in place!
Keep hustling folks.