How to design a Sales Incentive Plan that works

Just as you are in the process of finalising the design of your traditional sales incentive plans for next year with a design based on pay for performance sale, this is the last moment you want to hear that they don’t fundamentally work.

Psychologists studying motivation have discovered the opposite of what they expected, greater rewards often lead to lower performance, when the rewards are all extrinsic rather than intrinsic – the focus on maximising the reward leads to lower performance and lower job satisfaction. Worse still, overall performance can suffer, and unintended consequences can damage the business, as a drive to maximise short term goals ignore the health of the business. – sales people are the smartest, most adept people at gaming the system or policy to maximise rewards for minimal effort.

Compensation consultancy will advocate that the most simple alignment of output to reward will drive the best performance, the unintended consequence of driving any single measure, will be to compromise all others. Extrinsic rewards can drive irrational behavior, the greater the reward - the greater the irrationality.

Game theory demonstrates in the prisoner’s dilemma that two completely rational individuals may not cooperate, even if it appears that it is in their best interests to do so, rather they will seek to maximise their own outcome, even if that means compromising the overall performance.

Artistic creativity is dampened by financial rewards, with the best works being created for their intrinsic beauty and not stifled by the clients commission. Paying for performance turns any task into work, and the focus on reward optimisation. Rewards contingent on performance removes the intrinsic reward. Once you have paid your child to ‘take out the trash’ they will never do so again without a reward.

Simplistic compensation plans are easy to follow – but a single measure gives rise to unintended consequences, short term gain for long term losses. The quarter by quarter focus in public companies drive unethical behavior that has led to the demise of good companies, as long term customer satisfaction and business ethics are compromised as deals from next quarter and next year are pulled in to the current quarter, deals are shipped to the adjacent warehouse, rather than the customer to satisfy shipping targets.

In the short term, extrinsic rewards drive short term performance effectively, but not in the long term. Intrinsic rewards drive long term performance – when you love what you do – you never have to work another day.

Giving workers the opportunity to succeed in their task, enabling them to become masters in their trade, provide autonomy of how it is completed, a belief in the purpose – an understanding and belief in why they do what they do.

Motivation and rewards are driven by having a clear strategy, direction and goals, setting a plan, execution of the plan, step by step, achieving intermediate goals, provide rewards that are perceived to be fair and reasonable, and a reward for the progress made.

Recruit well, set high standards, pay more than average, manage under performers and recognise successes. Metrics should be broad based, measuring the different dimensions of performance, such that it is harder to game the system, impossible to achieve rewards through maximising a single metric, favouring a balanced score card that reflects the desired business outcomes.

When the role is intrinsically satisfying, autonomy provided to execute it as the individual sees fit, and training and development is provided to ensure the best skills are applied to develop expertise and mastery of the role – the motivation is to succeed and goals will be met.