Misaligned sales incentives are, at best, a waste of money. At worst, they cause high turnover of staff.
Aligned sales incentives can cause triple digit percentage increases in sales.
Alignment of sales incentives means alignment with:
- Country norms
- Industry norms
- Sales process and roles
- Company goal and culture.
Geert Hofstede gives us an insight into how, for multi-national companies, the remuneration model may need to be different to incentivise sales performance.
For example, in Hofstede’s research, ‘Individualism’ is the highest dimension for the USA at 91. For Thailand, it is the lowest dimension at 20.
Individualism is the degree to which individuals are integrated into groups. In individualist societies, we find the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty.
Additionally, ‘Long Term Orientation’ is the lowest dimension for the US at 29, compared to the world average of 45 and Thailand’s mark of 81. This low LTO ranking is indicative of the USA societies’ belief in meeting its obligations now.
In the US, rewards for short term individual goals (performance incentives) work well. In Thailand, in equivalent roles, longer term, team based rewards such as salary and annual team bonuses work better.
Using a stereotype to make a point, door-to-door insurance sales is a much shorter sales cycle and lower customer-salesperson relationship industry than selling multimillion dollar mining equipment.
We would want a door-to-door salesperson to concentrate on the result and whilst we would want them to build rapport with customers, it is not the main aim. We want to incentivise results.
A mining equipment salesperson, however, needs to create long term relationships across several departments in a mining organisation. We want to incentivise them to build customer lifetime value, not just the short term result.
The proportion of benefits which accrues to salary, superannuation, vehicles, loans and other long term incentives should be much higher in the case of our mining equipment sales person. Conversely, the proportion of benefits which accrues to commissions, quarterly bonuses, overseas trips and other short term incentives should be higher in the case of our door-to-door sales person.
Companies need to position their rewards within the industry norm such that they get a more or less aggressive behaviour than is normal for their industry. For example, if I wanted, as a mining equipment CEO, to have an emphasis on short term results, I would set commission within the remuneration mix, whereas my competitors may not.
Sales process and role
Consider two elements of the sales process when creating a rewards mechanism.
Firstly, the overall sales process favours short term incentives if the sales process has the following characteristics:
- Short sales cycles of smaller value products to many customers
- Sales people get most satisfaction from the sales result
- Sales is the predominant measurement of success
- Sales people own the sale and how the sale is conducted.
If the converse is true, long term rewards are warranted.
Secondly, within a sales process there may be roles which are, relatively, at either end of the spectrum. Getting warm leads may be a role which fits the short sales cycle description, whereas the conversion of those leads may fit more with a long sales cycle.
For instance, a team of sales people in a call centre charged with getting prospects to attend conferences or seminars have a transactional relationship with customers. It is their job to run a short campaign to get people to attend. It is another sales person’s role, once the prospects have attended the conference, to establish long term relationships and begin what may be a lengthy sales conversion.
People must be rewarded appropriately for their part in the sales process.
Company goal and culture
Companies that want to control sales adapting to market pressures over the long term should favour long term rewards such as salary, superannuation and medical insurance.
Companies that want to empower sales people to react to individual customer needs and favour a competitive internal environment should favour short term rewards such as commissions, bonuses, and awards.