Doug J. Chung

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Research</h5>
  <p>In the past decade, researchers studying sales force compensation have been moving out of the lab into the field, doing empirical analysis of companies’ pay and sales data and conducting experiments with actual reps.</p>
  <h5>The Findings</h5>
  <p>Companies sell more when they remove caps on commissions; “ratcheting”—raising a rep’s quota after a good year—dampens motivation; and a pay system with multiple components (such as various kinds of bonuses and commissions) can engage a broad range of salespeople.</p>
  <h5>The Implications</h5>
  <p>Many companies use experiments to improve pricing, marketing, and website design. Because sales compensation is a large expense and sales force effectiveness is a primary revenue driver, companies should apply analytics and experimentation to find better ways to pay and motivate their salespeople, too.</p>
 </div>
</article-ideainbrief><p>Before I became a business school professor, I worked as a management consultant. One engagement in particular had a profound influence on my career. The project involved working with the Asia-based sales force of a global consumer products company. This company practiced “route sales,” which meant reps spent their days visiting mom-and-pop convenience stores, servicing accounts. One thing about the organization surprised me: Its sales managers spent inordinate time listening to the reps complain about their compensation.</p>

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<p>Much of what we believe about the best ways to compensate and motivate the sales force is based on theory and lab experiments. But in the past decade, researchers have been moving out of the lab and into the field, analyzing companies&#8217; sales and pay data, and conducting experiments involving actual salespeople. The findings from this new wave of research support some current compensation practices but call others into question.</p>
<p>For example, studies clearly show that caps on commissions hurt sales. If managers must retain a cap, they should set it as high as possible to avoid reducing reps&#8217; incentives.</p>
<p>Although overly complicated compensation systems have their downsides, research has found that a system needs to include enough elements (such as quarterly performance and overachievement bonuses) to keep high performers, low performers, and average performers engaged throughout the year.</p>
<p>Managers should be careful in setting and adjusting quotas. For instance, studies show that ratcheting (raising a salesperson&#8217;s annual quota if he or she exceeded it the previous year) dampens motivation.</p>
<p>The research also suggests that it&#8217;s important to pay attention to the timing of bonuses: A reward given at the end of a period is more motivating than one given at the beginning.</p>
<p class="reprint">HBR Reprint R1504C</p>

How to Really Motivate Salespeople

Much of what we believe about the best ways to compensate and motivate the sales force is based on theory and lab experiments. But in the past decade, researchers have been moving out of the lab and into the field, analyzing companies’ sales and pay data, and conducting experiments involving actual salespeople. The findings from this new wave of research support some current compensation practices but call others into question. For example, studies clearly show that caps on commissions hurt sales. If managers must retain a cap, they should set it as high as possible to avoid reducing reps’ incentives. Although overly complicated compensation systems have their downsides, research has found that a system needs to include enough elements (such as quarterly performance and overachievement bonuses) to keep high performers, low performers, and average performers engaged throughout the year. Managers should be careful in setting and adjusting quotas. For instance, studies show that ratcheting (raising a salesperson’s annual quota if he or she exceeded it the previous year) dampens motivation. The research also suggests that it’s important to pay attention to the timing of bonuses: A reward given at the end of a period is more motivating than one given at the beginning. HBR Reprint R1504C

How to Really Motivate Salespeople

Summary.

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