In aggregate, U.S. companies alone spend more than $800 billion on incentive compensation each year. These same companies are spending three times more on incentive compensation than they spend on advertising. So naturally finance tries to ensure that comp plans have cost-control measures designed into them.
The finance organization, meanwhile, views the compensation plans as an expense to manage. That’s not surprising: Sales force compensation represents the single largest marketing investment for most B2B companies.
Stars seem to knock down any target that stands in their way—but may stop working if a ceiling is imposed. Laggards need more guidance and prodding to make their numbers (carrots as well as sticks, in many cases). Core performers fall somewhere in the middle; they get the least attention, even though they’re the group most likely to move the needle—if they’re given the proper incentives.
Studying Sales Compensation
Researchers studying sales compensation have long been guided by the principal-agent theory. This theory, drawn from the field of economics, describes the problem that results from conflicting interests between a principal (a company, for instance) and an agent hired by that principal (an employee). For example, a company wants an employee’s maximum output, but a salaried employee may be tempted to slack off and may be able to get away with it if the company can’t observe how hard the employee is working. Most incentive or variable pay schemes—including stock options for the C-suite—are attempts to align the interests of principals and agents. Commission-based plans for salespeople are just one example.
Advice about Setting Sales Compensation
Some of my advice would be straightforward: I would urge managers to remove the caps on commissions or, if they have to retain some ceiling for political reasons, to set it as high as possible. The research is clear on this point: Companies sell more when they eliminate thresholds at which salespeople’s marginal incentives are reduced. There might be problems if some reps’ earnings dramatically exceed their bosses’ or even rival a C-suite executive’s compensation, but the evidence shows that firms benefit when these arbitrary caps are removed.
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