Which type of bonus best motivates salespeople – an unconditional reward, a conditional bonus based on meeting performance goals, or a conditional bonus in the form of being punitive by withholding or even taking away bonuses if goals are not met?
For the sales force of an Indian manufacturer of durable goods, conditional bonuses work better than unconditional – but contrary to what their management had predicted, punitive damages did not yield better results, according to a randomized field experiment by Harvard University researchers, Doug J. Chung and Das Narayandas.
"Our results have implications for companies trying to more effectively manage their salespeople," the two write in a Harvard Business Review report on their experiment, "What's the Right Kind of Bonus to Motivate Your Sales Force?"
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"In general, sales force costs often represent the single largest investment for an organization, averaging about 10 percent of sales revenues, and up to 40 percent in B2B markets," they write. "As such, companies would do well to understand how best to motivate their salespeople, and to that end, judicious bonuses can be an effective tool."
The researchers assigned different weekly bonus schemes to 80 salespeople in the Indian company for a six-month period. Some received conditional bonuses, which were tied to sales quotas under three different treatments: standard, punitive and "real-punitive." Those in the standard group received a bonus after they met a weekly sales quota that was set 20 percent higher than what they had previously sold. Those in the punitive group were specifically told that they be penalized for not achieving their quota and would not receive a bonus. In the real-punitive group, bonuses were awarded at the start of the week but then withdrawn for those who didn't meet their quotas.
For those receiving unconditional bonuses, the idea was to encourage reciprocity, whereby salespeople would increase their work efforts in appreciation for the firm rewarding them with extra monetary compensation. Salespeople in this group were either given immediate bonuses at the beginning of the week, or delayed bonuses at the end of the week.
The researchers found that the conditional bonuses were, on average, more than twice as effective as the unconditional bonuses, resulting in a sales increase of about 24 percent.
"But, interestingly, we found little evidence of a difference between the standard and punitive treatments," the two write. "This finding runs counter to loss-aversion theory, which stipulates that people's desire to avoid a loss will be stronger than their desire to attain an equivalent gain."
The researchers also found that a conditional bonus could potentially demotivate salespeople over time, as the salespeople's performance in those groups was higher during weeks of a bonus treatment but lower in weeks after a bonus treatment.
"This result is consistent with past behavioral research that has found that too much extrinsic motivation may actually lead to a decrease in intrinsic motivation," they write.
Unconditional bonuses were effective only when they were distributed as a delayed reward, the researchers found, but the effectiveness of the delayed bonuses appeared to decay when such a reward scheme was repeated over time. By the end of the experiment, the effect had become marginal.
The experiment also showed that the company's managers had erroneously predicted that the real-punitive approach would be the most effective, "based on their gut feelings and past practices, not on quantitative data."
"The lesson is clear: Sales force compensation is a tricky issue, requiring decisions based less on intuition and conventional 'wisdom,' and more on hard, quantitative data," the researchers write. "We encourage companies to periodically experiment with their compensation systems, such as we did, as there is no clear-cut, magic rule for an optimal scheme. Firm and national culture are different, and so are people."
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Katie Kuehner-Hebert
Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.
