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What’s The Ideal Frequency For A Sales Quota?

Harvard Business School on Harvard University campus in Cambridge, Massachusetts, U.S.

Sales reps feed on two forms of compensation: salary, and a bonus tied to achieving a periodic quota. Would a more frequent quota incentivize better numbers? Doug Chung and Das Narayandas offer some answers.

Personal selling is a key ingredient in making the American economy go. According to the US Bureau of Labor Statistics, about 10 percent of the labor force in 2012—some 14 million people—was engaged in personal selling. Firms spend more than $800 billion annually on those efforts. Sales compensation plans are at the center of all this activity, the primary tool managers use to motivate and incentivize salespeople.

Sales reps feed on two forms of compensation: salary and a monthly bonus tied to meeting or exceeding a quota. This raises a key question for sales managers: What kind of quota is the most motivating? Could salesforce performance be kick-started if that quota incentive was delivered more frequently?

The answer is contained in a new paper, The Effects of Quota Frequency on Sales Force Performance: Evidence from a Field Experiment, authored by Harvard Business School marketing professors Doug J. Chung and Das Narayandas. “With so many people and resources at stake, the design of the sales force compensation plan becomes of great strategic importance to firms,” the authors write in the study.

It turns out if the goal is simply to increase the absolute number of sales, then a frequent quota is more effective—especially if you’re looking to boost performance of least-effective employees. But if the goal is to sell the high-profit items, then it’s better to stick with a long-term incentive, according to Chung and Narayandas.

The paper follows a 2013 study in which Chung and colleagues developed a structural model to determine the ideal frequency of quotas. That study showed that quarterly bonuses would improve sales among weak performers in firms that historically had used annual quotas.

“I saw this effect in the modeling world, but I wanted to test it in the real world,” says Chung, an assistant professor. “The best way to do that was to perform a field experiment.”

For real-world proof of how quotas affect sales performance, the researchers teamed up with a large electronics retailer in Sweden. For decades, the company had compensated sales people with a base salary and a monthly quota. But anecdotes from regional managers indicated it might be time for a change—largely thanks to the weather.

“In Sweden what happens is that if it’s sunny outside, people don’t go shopping; they stay outside and enjoy the sun,” Chung explains. “To make up for lost sales if it was sunny during the earlier part of a month, salespeople would have to work very hard for three weeks to meet their quotas at the end of the month. But if their sales were slow in the first half of the month, many of them would just give up in the latter half, because there was no way they could make quota.”

An ideal setting for a field experiment

The retailer was an ideal setting for a field experiment for a few reasons.

One, it operated 94 stores across the country, which would let the researchers test a daily quota structure in some stores, while testing the existent monthly quota in others. “We had to make sure the stores in the control group did not talk to the stores in the treatment group,” Chung says.

Two, the chain sold products ranging in price from less than $1 to over $500, which let the team observe how the quotas might affect sales on both low- and high-ticket items—mouse pads on the low end, wireless routers on the high end.

Three, and most importantly, the retailer was willing to participate in a field experiment. “Finding a real, actual firm wanting to experiment with its compensation plan is virtually impossible,” Chung says. “Opportunities like this don’t fall out of the sky. But the CEO saw a need. And he said, ‘Sure, let’s try making it a shorter quota—that is, a daily quota.’”

The field experiment took place for 30 days in in May, 2015, involving 337 employees. None were aware of the experiment.

The researchers tracked the employees’ sales performance before and after the experiment, noting how a quota change would affect the historical top salespeople as well as the historical worst performers.

They found that sales productivity increased by 4.9 percent, on aggregate, under the daily quota scheme. But the results were more dramatic among the lowest quartile of salespeople—those with the worst recent sales records in the company. That group saw an 18 percent increase in sales productivity under the daily quota.

Chung explains that low performers are susceptible to falling behind in a monthly quota scheme, becoming less motivated or less capable of meeting their quota the further they fall back. “So they just give up,” he says.

A daily quota, on the other hand, provides “a fresh start every day in which past performance does not affect current payoff and thus does not disturb current motivation,” the researchers write. “For high-performing salespeople, because they are more immune to the disutility of effort, even if they experienced bad luck earlier in the month, they would put in the additional effort necessary later in the month to meet their monthly quotas.”

Chung says the same ideas apply in school classrooms, where some students are intrinsically motivated to shine no matter the class structure, and others need a little more help.

“If you have one exam or multiple exams throughout the semester, the best-performing students will be fine either way,” he says. “But the low-motivated students, without periodic pacer exams, they’re the ones who will slack off for most of the semester until there’s only one week left before the final. And then they’ll say, ‘Oh, I can’t possibly learn all this material in a week, so I’m just going to give up.’”

An increase in the quantity of sales, but a decrease in the quality

While a daily quota spurred an increase in the raw number of products sold and dollars earned, the effect on the types of products sold was another story. In short, the quota change led all salespeople to focus on selling lots of low-ticket items. Under the daily quota, even the high performers were concentrating on such incremental sales, neglecting their focus on the high-ticket items that took longer to sell–but which had traditionally helped them reach their quotas under the monthly plan. The natural result: a decrease in sales of high-margin items.

Ultimately, the Swedish firm decided that the benefits of a daily quota outweighed the costs. At the end of the study, the retailer switched its quota plan from monthly to daily across the company and has maintained the strategy ever since.

The broad lesson of the study: A company’s quota structure should be tied directly to its sales strategy.

“If you want to increase revenue, just purely increase revenue, especially on a short-term basis, then maybe it makes sense to go to a frequent quota,” Chung says. “But if you want the sales force to focus on larger, higher-profit sales, then giving them a less-frequent quota—consistent with the length of the sales process—would make sense. The important thing is to consider what kind of outcome you want.”

 

Author: Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.
Source: Harvard Business School

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