The changing face of salesman incentives

COMPENSATION for sales staff is undergoing profound changes as companies fight the war for market share and talent. Incentives or variable compensation for salespersons is not a new phenomenon.

The concept flows from human motivational psychology, which postulates that achievement of a certain desired end (rewards in this case) drives human behaviour and action. Over time, this concept has not only been challenged but also shaped differently in the context of salesmen incentives.

In simple terms, organisations want to achieve more sales and this formed the basic metric for linearly aligned sales incentives. It is also referred to as the "insurance agency model" where agents get commission based on the value of policies that they sell and are paid up. However, this primitive thought did not account for the fact that more sales (at sometimes discounted prices) did not always translate to more profits, the key goal of most organisations. Organisations also realised that one person might not directly influence sales prospects as much as a team around him or her. This led to incentives oriented towards profits (or margins) and for groups. The group definition extended to beyond the "sales" role. For instance, the role of editors and writers of a newspaper cannot be any lower than that of the sales department in shoring up circulation. Similarly, customer service and backroom operations are important for many service industries.

Starbucks took it to a unique logic in some markets when it made the barista a bundled role player - order taker, coffee brewer, conversationalist, entertainer, machine mechanic, counter cleaner and cashier. The company felt that all of these contributed to the sales and repeat visits of customers and it was not easy to segregate them to different people given the short span of contact time with the customer. This obviously made the group incentive process a lot easier to administer. Of course, the "overbundling" brought in a productivity conundrum that Starbucks had to face. In the ecommerce era, the marketing role has perhaps taken centre stage more than the sales role due to the "pull" factors and thus marketers are incentivised.

The metrics have also moved on. Some companies reckoned that "current sales" is the result of "past efforts", especially in industries where there is a lag between effort and result. Further, some efforts yielded multi-year sales opportunity such as the high-value software contracts. Wipro, one of the leading software technology companies, recently won a US$100 million contract with the Netherlands-based media company Sanoma, accruing over several years. It, therefore, becomes important to count the effort as well as the outcome. A German company the writer was associated with brought in "project pipeline" into the calculation of bonus and incentives. This was recognition of the fact that creating a future stream of earnings is as paramount as today's sales.

Studies have estimated that it costs three to five times more to acquire a new customer than sell more to an existing customer. Some companies have imbued customer retention versus new acquisition data into the grid. Many companies also recognise the difficulties and the higher order selling skills required in selling new products or in new markets as opposed to established products and markets. Attaching different weights to such nuanced categorisation of sales efforts is one way to reflect the "quality" of sales and not just the quantum.

From dollars and cents, the measures are now acquiring new dimensions. Glaxo SmithKline (GSK) introduced in some markets a novel scheme of incentives for its medical representatives who call on doctors. Their survey revealed that most representatives ended up spending less than five minutes (usually one minute) with a doctor and often did not even meet the doctor. The diagnosis was that doctors expected sales reps to transfer new knowledge on diseases and drugs and not just drop-off samples. GSK linked incentives to doctor satisfaction measure (and re-trained the representatives to be effective conversation partners) - clearly a huge departure from the past. Thus, external ratings and assessments entered the arena of incentive calculation. It is now common to find companies including customer satisfaction or customer ratings as a basis for rewarding sales teams.

The incentive phenomenon has had its critics. Some reckon it skews the rewards towards short-term achievement (who can forget the lopsided financial industry rewards and the collateral actions that led to the 2007 crisis?). Shareholder interests continue to reign supreme even though the customer has been crowned the king. With shareholders chasing stock prices, compensation packages for CEOs and top salespersons got entangled with that one measure. The result is the short-termism.

Critics also argue that the system tends to favour the forwards and the goal scorers more than the midfielders, defenders and the passers. Salesmen develop super-sized egos when rewards rise to dizzying levels. With the perennial war on sales talent looming large, superhero salesmen are actively hunted. This undermines the development of qualified and professionally groomed salesmen pool in organisations.

A balanced incentive policy will need to reach the whole team that influences or causes increased sales, profits and customer satisfaction and should build in a multi-factor, multi-time formula that steers efforts towards sustainable goals. Such complex algorithmic models may come at the cost of simplicity but that seems inevitable but mitigable. Today's panacea of "apps" technology will take care of user friendliness as companies such as Bata have already demonstrated by developing an app for salesmen's use.