It’s always interesting when very smart people dedicate their time and effort to studying sales compensation. A link to a working copy of some recent (very impressive) work in this arena by professors from Harvard Business School, University of Virginia (Darden) and Yale university is attached (Click the HBS logo to access) for your reference.
The basis of the paper is a model that estimates the response of a sales force to various plan components and suggests some plan design best practices based on estimations of their model. Sections 2.2 through 5.4 of the working paper are deeply involved in some advanced mathematics used within the model and are must reading for those interested in deciphering 'fourth order Chebyshev polynomials', Bayesian Information Criterion and the like. Sections 1 through 2.1 and 5.4 through the conclusion are recommended reading for all, especially professionals involved in managing the sales compensation process through either plan design or administration. Below we've boiled down some of the suggestions from the simulations into a handful of best practice considerations along with a couple suggested "worst practice's" (yes, perhaps we are coining a new term that you'll see more in the future) as well.
Some Best Practices we can glean form this work:
- The use of accelerators (referred to by the authors as overachievement compensation) drove over 13% higher revenues & 2% higher profit than models that did not include accelerators.
- The use of cumulative annual quota (Year-to-date) is preferred over an annual quota with modeled revenue 2.5% higher with YTD quarterly quota's instead of an annual quota with year-end bonus.
- The use of quarterly quota is preferred to annual quota and results in 5% higher revenue in the model.
Some Worst Practices (Practices to avoid) we can glean form this work:
- Ratcheting individual quota based on that individuals past performance. "A" players capable of blowing out their numbers will game the system to make sure they are not penalized by outsized quota increases in future years.
- Use of a quota ceiling, capping compensation for overachievement of quota provides a disincentive for sales above the ceiling. e have not seen much of this practice
The conclusion of the paper is very much in keeping with existing Best Practices in sales compensation design. Quarterly bonuses keep the sales force engaged, especially those whose production may be lagging. Accelerators keep your "A" level high achievers engaged and motivated.
From the papers conclusion:
"We find that the quota-bonus scheme used by this firm increases performance of the sales force by serving as intermediary goals and pushing employees to meet targets. Features such as overachievement compensation reduce the problems associated with sales agents slacking off when they get close to achieving their quota. Further, quarterly bonuses serve as a continuous evaluation scheme to keep sales agents within striking distance of their annual quotas. In the absence of quarterly bonuses, failure in the early periods to accomplish targets caused agents to fall behind more often than in the presence of quarterly bonuses. Thus, quarterly bonus serves as a valuable sub-goal which helps the sales force stay on track in achieving their overall goal; they are especially valuable to low performers. In contrast, overachievement commissions increase performance among the highest performers."
For an interesting alternative viewpoint on motivation and sales compensation plan design check out the following video based on work by Dan Pink.