Doug Chung, pursued his PhD in marketing at Yale where he studied what strategies companies can use to manage and how they should structure pay to motivate sales reps. Based on this research and the work that he has continued as an Assistant Professor at Harvard Business School, Chung authored “How to Really Motivate Sales Professionals”. You can find the full Harvard Business Review article here. Most prior research on sales force compensation from the 1970s and 1980s was based on theory or performed in a lab. A new breed of researchers are observing how sales compensation plans function (or dysfunction) at real companies. As could be suspected, they have found that many standard compensation practices “probably hurt sales.” I wanted to share my 4 takeaways from this research into how to motivate sales reps.
1. Eliminate Commission Caps and “Ratcheting” Quotas. I often hear top sales performers complain (and more importantly leave their employer) due to commission caps and/or “ratcheting” quotas (the practice of increasing a rep’s quota after a good year). These caps are unfortunately common and intuitively de-motivating.
Chung cites a 2011 study by Sanjog Misra and Harikesh Nair (from UCLA and Stanford) that studied the sales compensation plan of a F500 optical products company. They estimated that eliminating both the commission caps and ratcheting quotas would increase overall sales by 8%. After implementing these recommendations, “company-wide revenues rose by 9%.” Although the study did not measure sales force turnover, I would be willing to bet that the retention of their top sales performers improved as well.
2. Balance the Base Salary / Commission Ratio Correctly. Our clients often ask us what the right ratio of Base Salary to Commission should be. Chung’s Harvard colleague Rajiv Lal, found that the key factor in this ratio is the level of uncertainty in the sales cycle. They gave Boeing as an example, which has a selling cycle that usually takes several years. With this in mind, Boeing’s sales reps should receive a much higher percentage of their pay in base salary. A quick trip to Glassdoor reveals that Boeing’s sales reps do, in fact, receive a very high percentage of their pay in base salary. At the other end of the spectrum, with an industry where “sales correlate more directly with efforts”, a rep’s pay can be based mostly on commission. Putting my sales recruiter hat back on, I caution my clients to avoid going too low with the base salary as the caliber of available talent drops precipitously.
3. Motivating Top vs Lower Performers. In their research, Chung and his contemporaries were interested in how the structure of a compensation plan affects top vs middle vs lower performers. With the top quartile of performers, they found that commission plans with accelerators that kick in after hitting quota are very effective at keeping these reps motivated and engaged once their quota has been achieved. At the other end of the spectrum, lower performers were most motivated by quarterly bonuses. The final finding was a suggestion to shift from quarterly bonuses (in cases where quarterly bonuses exist) to cumulative quarterly bonuses. Chung’s research suggests that sales reps’ motivation flags in a given quarter once the rep realizes that hitting the quarterly bonus isn’t possible. By making the bonuses cumulative, most reps stay motivated to sell whatever they can that quarter so they won’t fall too far behind with their next quarterly bonus.
4. Experiment. Given what’s at stake with compensation plans, companies are allowing academic researchers to conduct experiments with their sales forces’ pay structures. Some of what they have uncovered is encouraging. I’m personally going to try experimenting with two of Chung’s suggestions with my rookie recruiters. The first suggestion is to give cash incentives to a rep once they pass a series of product knowledge tests. The research so far has shown an increase in sales from the reps that pass these tests (compared to those who don’t). The second suggestion is that many sales reps value non-cash incentives more than the actual value of the items received.
Final Thoughts on How to Motivate Sales Reps.
Chung recommends a pay plan that’s not overly complicated but has just enough elements to keep top, average and lower performers motivated (see point #3 above for his suggested structure). My add, based on interviewing thousands of sales professionals, is to keep the basic elements of a compensation plan fairly consistent year-to-year. Few things make a sales rep more angry than constant wholesale change to how they get paid. In fact, I’ve had several top sales performers that were doing well financially tell me that their #1 motivator for switching companies was the constant comp changes.