Improving Sales Incentives With Realistic Goals

November 7th, 2017

incentive-11-7-17.pngThe use of incentives to influence the behavior of sales people has a long history in the United States. Short-term incentives (STIs) and sales goals have become ubiquitous in all types of sales programs, and are used to motivate employee behavior, but at what cost? Optimistically, it is assumed that growth in sales is a win-win for all involved. The manifestations of the “win” are strong company growth, shareholder gains, management and employee bonuses, customers who are better served and long-term economic growth for the United States. But a closer examination of the costs of mismanaged STIs reveal a dark, frequently unspoken, negative impact on all but a few select beneficiaries. Unfortunately, examples abound.

Many years ago Sears, Roebuck & Co. and its automotive unit was found to have performed unneeded repairs on customer automobiles when incentives were changed to provide sales people with compensation directly related to repairs. One more current example of the costs of mismanaged STIs can be illustrated by a shareholder lawsuit against Wells Fargo & Co. that alleges the company’s management “repeatedly and brazenly” failed to serve in the shareholders’ best interests during the time more than 2 million (recently increased to 3.5 million) fake accounts were created. Looking beyond this one current example, the research is clear that if left unchecked, short-term incentives can lead to, among other things, unethical and harmful behavior toward customers, which in turn leads to depressed share prices, debt downgrades and regulatory scrutiny.

Looking Closer at Employee Incentives
Today, customers have found their voices, and legislators are taking notice. It may come as a surprise to some amid all of the televised Congressional hearings and regulatory reviews that an approach and methodology to forecast, monitor and detect problematic sales practices has been developed. This new methodology is the result of research detailed in a recently completed paper “Sales Practices-Understanding the Behavior They Incentivize.” The advent of new computing technologies (e.g. machine learning) has provided insights that may have been difficult to obtain previously.

The Origin of Mismanaged STIs
Sales organizations are regularly challenged to develop accurate benchmarks or “forecasts” of future sales. The forecasts often have little, if any, basis in facts, and frequently reflect only the wishes of the finance department or management. This leads to incentive plans that are not only unrealistic, given a particular environment, but also encourage harmful behavior toward customers. It should be said that “incentive” normally means employee bonuses of cash or stock paid out for attaining certain goals. However, this interpretation excludes one of the most significant incentives companies can use to motivate employee behavior—retaining one’s job. As the psychologists Daniel Kahneman and Amos Tversky found in their research (Prospect Theory: An Analysis of Decision Under Risk, 1979), people feel a loss more strongly than a gain. To that point, an employee will likely take a greater risk to avoid losing his or her job than he or she would have taken to get a bonus.

The methodology outlined in the Sales Practices paper utilizes historic information and dynamic independent variables to provide a picture of expected performance behavior down to the individual level. If the expected performance of an individual is well understood, then any significant deviation can be detected and reviewed. This same methodology can be used to forecast behavior, given a certain set of conditions (e.g. population change, inflation, etc.) and used to set sales goals based on specific environments. Machine learning and other advanced approaches could speed up the process of determining realistic sales goals. Utilizing this methodology, organizations will no longer need to perpetuate blanket sales goals across large geographic and/or client segments, irrespective of the nuances of the various segments.

Regardless of research regarding the effect of STIs, the use (overt and otherwise) is not likely to change soon. As regulators, shareholders, and others focus more intently on the behavior that is incentivized, the utilization of scientific techniques to monitor and forecast expected performance will become more valuable to all types of organizations.

jlenz

Jimmie Lenz is a principal at The Financial Risk Group. Mr. Lenz has held a number of different positions during his twenty-five years plus in the banking and capital markets industry.