Juuust right incentives

Tim Houlihan

Sales leaders are always trying to figure out how to get the most out of their reps at the lowest cost, and incentives are excellent at revealing that sweet spot.

Researchers have confirmed that paying too little is insulting and paying too much can cause reps to choke. But they’ve also shown that paying too little can be worse than paying nothing at all. Worse than nothing!

Finding the sweet spot for an incentive is like how Mama Bear’s porridge was juuust right.

When are rewards juuust right?

The rule of thumb for calibrating incentives is to pay out between 3 and 10 percent of total compensation (commensurate with the period the incentive is active). But there are some important nuances to consider:

Match your company culture. If your company lives and dies on razor-thin margins and frowns upon long lunch breaks, then your incentives should mirror that approach. Just avoid paying too little.

Example: A national discount clothing retailer decided to recognize top sales associates by giving them a 2-liter bottle of soda at their monthly team meeting. The reward was so small the employees begged managers not to receive the reward because they didn’t want to be subjected to the embarrassing 2-liter soda ceremony. Don’t cheap out.

Acknowledge job title and seniority. Because job title is a formal way of identifying status within the group, rewards should align with job titles. Sales organizations are like tribes, and reinforcing the pecking order can bolster the value of the incentive.

Example: A national prescription fulfillment firm wanted to reward team members for their individual roles in a company-wide initiative to boost sales. Senior sales associates’ salaries were only slightly higher than sales associates’ but were rewarded more generously because of their average tenure, job title and position in their culture.

Focus on total earnings. Plot the total expected earnings for each rep on a curve to understand the distribution, divide them into like groups and use total comp for your cornerstone for calculations.

Example: Consider a global telco whose call center reps could double their base salary by earning commissions. The incentives were calibrated at 5 percent of total anticipated compensation during the period. It was successful and the ROI was excellent.

Get real about duration, difficulty and risk. These are critical. The best duration of an incentive is no longer than 90 days. Focus is a precious commodity; the longer you ask for it, the harder it is to sustain. If your incentive lasts longer than six months, stop calling it an incentive. Task difficulty is critical, too. The more difficult the task, the greater the incentive. Also, the element of risk influences the size of the reward. Asking reps for an all-or-nothing commitment to their goal requires higher payouts.

Example: A global pharmaceutical manufacturer uses 3 to 4 percent of base pay for spurts and 7 to 8 percent when introducing new products to the market. Their duration is never longer than 90 days and these percentages give them good results.

Change reward type: Truth: $200 in cash does not have the same motivational power as a $200 gift card or a $200 watch. We may prefer cash over other kinds of rewards, but it’s not the best motivator. Research indicates the further away the reward is from the dollar sign, the more effective motivator it is. The $200 cash will pay bills and be forgotten quickly. The watch will last forever.

Example: Think about your own experiences: the more utilitarian the reward, the less memorable and motivational it is; the more luxurious the reward, the more it gets internalized and remembered.

The just-right spot is relevant to job title earnings, duration, risk, difficulty and cultural norms. The best way to tell if Mama Bear’s porridge is juuust right is to sample Papa Bear’s and Baby Bear’s and measure your results.

Tim Houlihan is an evangelist of applied behavioral economics with more than 25 years of experience in product development, training, sales leadership and marketing strategy. His consultancy is based on authentic, empathetic and insightful business partnership to help clients ask the next question. Tim can be reached at tim@timhoulihan.com.

Online bonus: An easy-to-follow outline for calculating the “just right” value of your incentives can be found at SalesandMarketing.com/lift.