How to Make the Psychology of Sales Compensation Work for You
How can psychology help us understand what motivates people? And in turn, how can we use that information to help us design and implement great sales compensation plans?
This is the topic Performio CEO David Marshall tackles along with Andrew Price, Performio’s Director of Customer Experience, in a recent webinar.
The key to understanding what Performio can provide for you and your business is to understand its “Ready Set Go” platform, which helps you answer key questions about how to design the best sales compensation plan for your salesforce. At Performio, we’re always ready to answer the question, “Why sales compensation?”
In short, there are three reasons why, if you want your business to succeed, you need to design a sales compensation plan:
- Align your workforce — make sure they’re clear on their goals and that they understand how to achieve them
- Retain and attract top talent
- Motivate discretionary effort
It’s that third point David and Andrew focus on today: What’s the best way to motivate people, and how do we use a sales comp plan to best achieve that result?
The Psychological Basis for Sales Motivation
When you’re looking at how psychological theory may play a role in sales compensation, perhaps the best example to look at is the work that Frederick Herzberg did in the 1960s. He proposed a two-factor theory of motivation, which we know better as intrinsic versus extrinsic. The theory states that there was a set of factors that would lead to increased employee satisfaction, while there was a corresponding set of factors that could cause employee disenchantment.
Herzberg argued that extrinsic factors were the most important ones in the workplace. These are the “hygienic factors” that drive job satisfaction and motivate employees in the workplace.
Extrinsic motivation factors include:
- Job security
- Fringe benefits
- Work conditions
- Paid insurance
These are the most important factors on any job site. If these factors are not present, there will be employee dissension and dissatisfaction.
Intrinsic factors, on the other hand, are the less tangible employee needs.
Intrinsic motivational factors include:
- Meaningful work
These are also important elements for any manager to focus on to motivate his or her employees. The focus on intrinsic factors has become more popular in the workplace over the last few decades. While not as important as the extrinsic factors, they are helpful to create added job satisfaction.
As David notes in the webinar, from time to time find we come across contrary views on this theory. Take for instance the work of Daniel Pink on the surprising things that motivate people. There is also the work of Alfie Kohn, who is well-known for his critique of incentive compensation in the workplace. Much of this work, especially the work of Pink, argues that motivation is all about the intrinsic factors.
At Performio, our answer is you must have a balance of both. As Herzberg noted, extrinsic factors are hygiene factors. If you get these elements wrong, it will have a very negative impact on engagement, motivation and job satisfaction. It’s imperative to get incentive compensation correct, but don’t necessarily view it as a sort of positive motivator.
The Truth About Motivating Salespeople
Clichés are usually based on known experience or observation. And salespeople have more than their fair share used to describe them.
- Salespeople are coin-operated. Coin-operated implies all you need to do is just throw some money at your salespeople and that will motivate them to do whatever task needs to be done.
- The Lone Ranger. Salespeople are out there on an island doing their own thing and again all you need to do is throw some cash at them to keep them happy.
- Ego driven. This cliché says salespeople are totally driven by the need to be number one.
In some ways, these clichés have a nugget of truth, as many clichés do. But none of these apply to all salespeople, or even to one salesperson, all the time. The main point is that people are complex. And as the world of selling gets more and more complex, the nature of what makes salespeople successful becomes more complex, as well.
Don’t think of is at the carrot and the stick; hitting your employees over the head, so to speak until they achieve the results you want is not a good motivational factor. A more considered and nuanced approach to sales comp is much more successful in designing and implementing sales compensation programs that, in turn, drive the results you want to see — and that your business needs.
Here’s another well-known cliché:
- Salespeople are money-motivated. Surprise! Actually not a surprise at all. Of course, salespeople are money-motivated. You could realistically argue that all people are money-motivated to a degree. The problem is people tend to get locked into this dichotomy of intrinsic versus extrinsic factors.
The world of sales is changing. If you went back 100 years, the role of the salesperson was pretty well known. You had the classic NCR sales model where the sales rep would go out on the road, adhere to the sales process and close deals.
Today, the Internet is removing the middleman from the sales process. As a result, the sales world is less transactional because most of those transactional deals are now being handled online. People are needed to close sales in person, and that’s where the idea of team sales comes in.
That is why sales are increasingly becoming a team effort. Yes, you still have individuals like account executives and business sales professionals. There is an element of the Lone Ranger to what they do, in that they represent their territory when closing a deal. But the marketplace is becoming more complex. So now when they close the deal, they may bring in the sales engineer, or other resources. You’ll even see cases where the CEO is involved in closing a big deal. These are examples of the team approach.
The key question is how do you reward and motivate people in a team environment? And how is sales compensation relative in that context?
- In 1999, most businesses probably had much larger sales staffs than they do in 2018.
- By 2030 or 2040, you’re going to have a smaller sales population. But it will be a higher value sales population and doing more complex sales.
- These won’t be your coin-operated Lone Rangers. It will be highly-educated, sophisticated sales professionals who will work with their colleagues to close business.
These changing elements beg the question: What role do sales compensation plans have in this brave, new future? From time to time, you will hear people say, “Why are we paying these people on commission?” or “We’ve got too many people on commission,” or “Commissions just don’t work.”
The key, as David discusses in the webinar, is to make sure that you have the right people on the bus. Maybe it’s time to review who is eligible for your sales compensation scheme?
This returns us to the notion of extrinsic factors. If you mess them up, you going to have real problems with your workforce.
Occasionally you will read articles online or in print that argue, “We don’t need commission anymore, we’re just going to pay people a salary.” There may be the odd sales organization with a hyper-sales team-based environment where almost everyone in the organization is involved in making the sale where this may be true. But this is not the typical case.
It’s true that factors like benefits and the meaning of their work are important to employees. This line of thought has become more popular as Millennials and the oldest of the iGeneration join the salesforce. No one should underestimate that. But you also have to ask yourself: do you have any staff who volunteered to work at your company?
No. Most people are not mercenaries — but everyone expects to be paid.
Sales and Sports: Driving High-Performance
The sports world is much like the sales world. There are extrinsic and intrinsic factors and motivators in both. Think of a championship sports team or sales team for that matter. Everyone has their different roles and everyone is very clear on the goals their team is trying to achieve. They are intrinsically driven to achieve success. Yet there are external, extrinsic factors. Compensation is an important factor. Every player on some level has incentives in their contracts.
They may not think about when they’re on the field, but variable compensation plays a huge role in sports.
Performio recently analyzed a number of research papers focused on what makes a super high-performance team and what motivates high performers. The research showed that high performance comes from:
- Successful coaching
- How these teams use data to make smart decisions
- Transparency of the process
- Healthy competition
In the same way that sports teams draw upon these factors to create success, sales teams can do the same.
Remember sales compensation is a hygiene factor and it’s a commercial transaction. It’s about aligning pay-for-performance. And if you don’t get that factor correct, your sales team or your sports team is going to fall apart. If you underpay people what they’re worth, they will leave your organization. If you overpay your salespeople, it’s just money out of your pocket. That’s why it’s so important to get the sales comp angle correct.
Paying for Performance
If your employees expect to be paid, you should expect performance. At Performio, we are very strong on pay-for-performance. It’s a very simple thing but it may be the most important thing. And an important part of pay-for-performance is that performance is ultimately time-based.
Some people might say, “We don’t need to motivate sales or commissions. We’ll just give our salespeople a salary and if they do really well during the year we will give them a big pay raise.” This often doesn’t work for salespeople because they want to know the “line of sight.” They need to know what they are going to be paid for closing those important deals. They are accountable and they can be measured. It is very important to hold salespeople to an accountable goal. This means, however, that reward frequency is important whether it’s monthly or quarterly. It must be more than an annual thing. Running a salary-only plan is, in the words of David, “utterly batty.”
Let’s go back again to that idea of the sales representative versus the sales team. As long as there is some element of the Lone Ranger to the sales process, it’s possible to pin goals and quotas to an individual employee. That means you need to have a compensation plan that is tied to their performance.
Sales compensation remains the best way to motivate salespeople. It’s a commercial equation and discipline, not a psych clinic, so don’t get hung up on the idea of how to motivate people. People are complicated. If you have a sales staff of a hundred or a thousand, how do you expect to motivate all the intrinsic differences in all those people?
You simply can’t. What you can do, however, is pay for performance.
- The art of sales and compensation is knowing how to measure performance and how much you’re willing to pay for it.
- It’s a balance between how much you want to pay out and how much your salespeople want to receive for their efforts.
- The only way you’re going to have a happy medium is to measure performance very accurately and know how much exactly you’re willing to pay for that performance.
It’s also important to pay attention to the marketplace. You need to be aware that sometimes there are influences beyond your control. If you’re only paying 6% compensation on a $100,000 contract but the market is paying 10% you need to think about what you’re doing. This is the beauty of a good sales compensation plan and Perforio — your ability to dial up or down your plan and your goals. It’s not only about how you motivate people, but how you attract and retain good people. And how you align them with a goal.
So, as David added, when you think about pay-for-performance you’re actually thinking about accountability and measurement. You need to be able to measure performance and then use payment to hold people accountable. One of the key rationales for incentive compensation is that you’re not paying people a salary. They can’t just cruise along. So if you want to be really good at sales compensation, don’t think too much about psychology or being a puppetmaster and trying to drive people’s behavior. Instead, focus on how you can accurately measure performance and how you can hold people accountable to your sales compensation plan.
Finally, remember to keep your plans clean.
- Don’t let the hygiene factor become a demotivator.
- Work out who should be eligible for your purposeful plan.
- Be great at measuring performance.
- Be great at holding people accountable.
- Get the quarters right, the metrics right and the payments right so that there are enough risks that measure that accountability.
If you do all these things, engagement and motivation will follow. The reality is that there are plenty of people who are motivated by the idea of earning more money and hitting their targets. Create a great sales compensation plan, and you will absolutely have a motivated workforce.
Let Performio Help You Create the Sales Compensation Plan Your Company Needs
Performio is a great way to track and manage sales compensation. Our software is a SaaS system created and designed for salespeople. We’ve been working in this field for a long time, and we know how important good information is to people in the field. Our goal is to implement best practices to help you motivate your sales staff and streamline your sales compensation initiative management to eliminate hidden costs. We have different packages to suit different sales team sizes. We can help your business prosper no matter its size.
If you want to learn more about our great software, you can get a 14-day demo at any time.