Does Monetary Incentive improve performance? What does it really take to motivate sales force?

It’s an age old question; something we grapple with many a time. Should we give monetary incentive to improve performance and does it really release effort ? There have been many explanations and variety of research articles on this topic. Can we draw some parallel from the phenomenon of cognitive dissonance?

This article explores:

·        Cognitive dissonance and rewards

·        Cognitive dissonance - Over Justification and Internal Justification

·        Sales and Incentives

·        Final Nail in the coffin: Monetary or Non-Monetary Rewards?

Other day I was listening to a podcast from Yale University on Cognitive Dissonance Internal and Over Justification Phenomenon and found it extremely interesting in the way it is linked to rewards. Cognitive dissonance as a concept is applicable to various fields and all the more applicable to organisational psychology.

What is Cognitive Dissonance?

The basic concept of the cognitive dissonance theory is that we seek consistency within our beliefs, values, emotions and attitudes. Hence, the simultaneous relationship among them need to be in harmony, otherwise we have a cognitive dissonance which results in a discomfort. The state of discomfort is what drives our motivation to adapt our cognition in a way that the source of the dissonance becomes harmonious allowing us to regain a state of comfort.

Well above might be a little difficult to comprehend without an example; lets actually take an example of psychological experiment done by Festinger and Carlsmith (1959) at Stanford University.

Experiment involves two groups given a ridiculously boring task moving spools in a box for 30 minutes and moving some pegs around for 30 minutes.

Experimenter gives one group 1$ each and another group 20$ each to the task ( Both are significant amounts at that time and 20$ would be approx. 167$ today with inflation) . Experimenter influences the individuals in the group who were given 1$ that everyone by saying how the task is very interesting, and shared some snippets of great learning. The group gets convinced by the words of the experimenter. Post this they were told to go and meet other group who was given 20$ each and tell them that they found it interesting and great. Well, now comes the interesting part! When individuals from group which was given 1$ each for the task meet those who were given 20$; those who were given 20$ said that it was extremely boring and the group which was given 20$ for the task give it a poor rating.

Above is an interesting play of cognitive dissonance. Psychologists are interested in the way we deal with two thoughts that contradict each other – and how we deal with this contradiction. Initially you thought it was boring but you got convinced eventually when someone tells you nice stuff about the task which you just did. Then someone pays you 1$ to go and tell another group that it is interesting. You don’t lie and you are honest because you don’t want to sell your conscience and honesty for 1$ sum of money. Your mind reconciles to the fact that task was not bad and it was interesting and would want to do the task again.

While someone who was given 20$ thinks it’s a great sum of money and infact obnoxious and this justifies telling the world that task was boring while they did the task as they were given significant amount of money. Here 20$ does not in any way motivate people to think task is interesting and wanting to do it again.

Over Justification Phenomenon:

Over-justification occurs  when we view our behaviour as caused by the situation, leading us to discount the extent to which our behaviour was actually caused by our own interest in it

Mark Lepper and his colleagues (Lepper, Greene, & Nisbett, 1973) studied the overjustification phenomenon by leading some children to think that they engaged in an activity for a reward rather than because they simply enjoyed it.

Group of children were given markers to play around. The experimenter randomly assigned to one of three experimental groups. They started playing with the markers and observations were noted.

After some time they were given further instructions

Group 1: Was told they would receive a significant reward after they play

Group 2: Was not told anything but got reward

Group 3: Was not told anything and given no reward

After they were given rewards they were sent back into the same room. It was observed that Group 1 was least active now and Group 3 was most active (though no reward).

Why?

Group 1 started started linking their playing with reward and were no longer that interested in the activity. Group 3 was still continuing to play with same fervour. Group 2 activity was in between the two.

In group 1; reward was probably perceived as attempt of getting someone to get you to do something and not a great motivator.

Same is true even when parents would indicate that you would be given a bicycle or something precious for coming first in class. However recognition, pat on the back, praise of accomplishment is more effective and increases our liking of the activity and improves our performance significantly. The same goes for grown-ups: money becomes associated with work and work can be dull, tedious and painful. So when we get paid for something we automatically assume that the task is dull, tedious and painful—even when it isn’t.

This is why play can become work when we get paid. The person who previously enjoyed painting pictures, weaving baskets, playing the cello or even writing blog posts, suddenly finds the task tedious once money has become involved.

Internal Justification:

Volunteers tend to be extremely dedicated to the cause that they work for, relative to the employees of the organization who get paid for doing good for the society. They don’t get paid well for the kind of efforts they put in. They justify their work by strongly believe in the work that they do.The behaviour of dedicating time and effort not for financial reward needs to be justified, so attitude is strengthened to justify the behaviour. 

What to do with sales force?

Infact many companies do have a very high base salary and 10%-15% variable pay depending upon company topline, bottomline but scheme varies for the sales force. Is this really the optimum strategy?

Researchers studying sales force compensation have for long now been guided by the principal-agent theory. This theory, from the field of economics, describes the problem that results from conflicting interests between a principal (a company) and an agent (an employee). To ensure employees don’t slack off ; most schemes have stock options and incentives etc

Salespeople were paid by commission for centuries. Why?

·        Easy to measure the short-term output of a salesperson

·        Traditionally sales had little supervision

·        Studies show typical sales person takes high risk and hence high appetite

Dung 1980s, Rajiv lal and several co authors researched a lot of firms and understood that incentives should be designed according to Industry sales cycles. For Instance, selling planes of Boeing might require several years of talking before a deal fructifies while a door-door sales person might be able to book revenue every hour.

In late 1980s, there was another research article by economists Bengt Holmstrom and Paul Milgrom. In their theoretical paper, which relies on a lot of assumptions, they found that a formula of straight-line commissions (in which salespeople earn commissions at the same rate no matter how much they sell) is generally the optimal way to pay sales representatives.

It could also be beneficial to have individual incentive plans for instance quarterly, annual , depending upon territory, depending upon whether someone has accrued it by luck( for instance sales accruing through external factors like a sudden population increase in a new area increasing sales in Walmart). However administering this would be really difficult and also its possible that employees share data with each other leading to further disruption.

How should you design the plan?

1.      Keep it simple. Have a good base pay

2.      Balance between base pay and variable should be optimum also keeping in mind the industry

3.      Don’t keep upper cap- Misra and Nair UCLA 2011 studied a optical fibre company and understood that keeping a cap for top perfomer actually hurts the company and removing improved revenues significantly

4.      Payout periods depending upon industry could be a week to a year. However shorter payout periods kept low performers engaged.

Top students will do fine in a course in which the entire grade is determined by a final exam, but lower-performing students need frequent quizzes and tests during the semester to motivate them .

5.      Its important to have non monetary contests or recognition programs

Why are non monetary rewards important?

1.      It creates an ever lasting memory- Cash will be used to purchase something which will disappear into memory void

2.      You end up spending cash on necessities which need not be satisfying- Removes the guilt of choosing something indulgent

3.      Money lacks braggability rights- You always would brag about the exclusive trip to Switzerland with your family which you received for topping the charts

Inference- Monetary incentive might not actually create an ever lasting impression. However, the type of non monetary incentive you are providing then becomes extremely important.

Conclusion:

While rewards play an important role one needs to keep effect cognitive dissonance in mind while designing a rewards program. Over Justification and internal justification have their role to play in cognitive dissonance and one should be totally cognizant of this fact. One should consider several facets while designing a sales force plan the non-monetary rewards program is very important if not more the monetary aspect of sales incentive .