Why incentives work (or don't)

The power of incentives is real and you will be able to improve your business and increase sales if you have a stronger, more aligned incentive structure. The key elements to creating this are answering these key questions: 

For What? / How Often? / How Much?/ How Long?

Though incentives and incentive structures are a key element for any successful growth plan, too often founders and management lack knowledge and key information on how to develop it:

• You have some sales experience, but wouldn’t classify yourself as an expert in the field
• You are in the stage of growing your sales team to spend more time running the business, but aren’t sure what kind of people to hire
• You participate in founders’ groups and have chats with other founders to discuss how to build a sales team, but neither of you has much experience
• You know incentives matter, but you’re not sure why or how
• You know every sales team has a commission scheme, but are unsure which is best: On profit or revenue? Now or later? X or Y%? One large or many small payments? 

Does this sound familiar? 

To determine how much it matters how incentive structures are designed, a great place to start is the latest research on how people respond to different incentives. The overwhelming conclusions are that in order to design an effective incentive structure aligned with your revenue targets and culture aims, you must look at it holistically in addition to evaluating them from each of these perspectives:

• How they are designed: What type of behaviour / actions are actually being incentivised
• How are they given: monetary vs. non-monetary incentives can have a very different impact
• How often is it given: annual, monthly or immediately after achieving the target
• How much is given: percentage of revenue/profit or pre-determined amount?
• How does the behaviour change if/when they are withdrawn: do they regress back to their old behaviour?

FOR WHAT: 

To begin with, we must be clear that incentives do not work for everything. Incentives, depending on how they are perceived, may well have negative effects. Incentivising existing behaviour can be counter-productive if the incentive does not fit. A great example comes from a study on the impact of ways to increase blood donation. Being very original, the organisers offered to give all blood donors a small financial compensation. Blood donations immediately fell. At first glance that may be surprising, but not if you look a bit deeper.

What they had entirely missed was that the perception of charitable giving (both inward and outward) was a key reason why people donated blood. By paying them, they took that away and the financial compensation was way too low to offset that. Things improved a bit when they changed it to send money to a charitable organisation of their choice, but not more than the initial levels. It turns out that “I gave blood” pins or stickers were a much better way to increase the number of blood donations by recognising and playing to donors intrinsic motivation to brag about giving blood.

A different study, led by Frey and Oberholzer-Gee, also addressed a similar issue, namely that incentivising behaviour can also have a signalling effect. In the study’s case, offering a  community a large financial compensation for the right to place a nuclear waste site on their territory signalled that the risks involved were high, and likely made community members more wary of accepting the offer. In sales, the same can happen. Offering salespeople incentives for already existing behaviour may well end up convincing them that said behaviour is hard, not very fun and they would be better off not doing it, resulting in exactly the opposite effect of what you were hoping for. 

You also must make sure that any incentives match the peoples’ skills. Incentivising sales, when your employee has no idea how to make a sale is useless. In these cases, incentivising required steps (such as making calls, organising meetings, pitching) will have a stronger impact and ultimately get you closer to the end-goal of increasing sales. A good study on this subject, on student grades in Mexico, found that the key to improving grades was increasing student attendance. Once students were paid to go to class, grades improved. Identifying and incentivising change at the root level, not the symptoms, is how you get to your goals.

In the same study, they also determined that their incentives could have effects beyond the students being paid. Other classmates’ and siblings’ attendance also improved, as they took cues from the students being paid and adapted their behaviour. Incentivising managers and key employees can have positive impacts beyond the immediate circle and instil the behaviour you are aiming for in other teams as well.

HOW OFTEN:

Smaller, but more frequent rewards work better. People are more motivated when they have the prize in-front of them. This is the same conclusion that Gneezy, Meier, Rey-Biel came to in their paper published in the Journal of Economic Perspectives, which showed that a lower total amount given daily was more effective than a larger total amount given less frequently.

HOW MUCH: 

Pay enough—or don’t pay at all. Incentives need to match the effort required, otherwise they may well be counterproductive. In a good example, employees invested more effort when they were not compensated for it in comparison to being offered a small compensation. Once compensation levels rose above a critical level, higher payments resulted in higher effort. For most tasks, if incentives are large enough it will be an additional source of motivation. If it is too high, however, people may “choke under pressure” (Ariely, Gneezy, Lowenstein, and Mazar).

HOW LONG:

Incentives are used to form habits. Once behaviour has become a habit, it is possible to remove the incentive and apply it elsewhere instead. A good example of this is when onboarding sales people. When they first start, incentivising them to maximise the number of meetings they arrange is a good approach. Once they get the hang of that, you move on to the next step, for example incentivising doing demos. This continues until eventually you get them to the sale. By then, you can expect that they have formed the right habits and use a repeatable process

TAKEAWAYS

• The key to building a strong, well-aligned incentive structure is to know who you are creating it for. What motivates them? If they are not motivated by what you as a company can offer, it will only lead to problems down the line. Motivation is key in sales and as soon as motivation is gone, so are sales. Hint: just because it doesn't motivate you, doesn’t mean it can’t be a strong motivator for someone else.
• Try to pay up as soon as you can. It is not realistic to pay immediately, but there is a balance. Non-monetary rewards such as a handshake, congratulations, a team clap or cheer immediately can go a long way. Combining this with a bonus on their next paycheck and an end of year reward them with an award or team bonus strikes a good balance.
• Think of incentives holistically. People do not just want money thrown at them, and purely monetary incentives can be counter-productive. Non-monetary incentives can be a great option for companies that don’t want to break the bank but still have a big impact. Career development (not just as a manager, but as a specialist), recognition in front of team members, asking their opinion, getting them involved in different projects or free use of your products & services can be great options
• Adapt your commission and incentive structure as the goals of the business or team change and as your team members grow and change. You want to incentivise good habits, and adapt them as your processes change.  Always check-in with your team to make sure they are still motivated by your incentives.

In this article I do not aim to provide you with THE answer on how to build an incentive structure, but instead I hope to shed some light on the different elements you have to take into consideration, how they impact behaviour and how you can best use them. 

Selling is hard and making a sale is only the result of all the right decisions leading up to it. 

Please get in touch with me to chat if you have any questions, want to discuss certain points in more detail or are growing your team and want to create the right type of incentive structure for your business.

This is part 1 of my posts on the different elements of building a sales team.

Alexandra (Ali) Baker