What should be the appropriate frequency of quotas – daily or monthly? Identify your desired outcomes and consider unintended consequences before you answer this question.
Sales organisations often struggle to find the best way to motivate their sales force.
Some common questions include:
- How much of a rep’s compensation should consist of a fixed salary and how much should be based on commission?
- Should commissions be capped?
- What’s the effectiveness of bonuses and other incentives?
Sales quota research
While past quantitative research has investigated some of these issues, in our recent study we focused on an under-researched aspect of sales force compensation: sales quotas. More specifically, what should be the appropriate frequency of quotas – daily or monthly?
To answer this question, we conducted a large-scale field experiment at a major retail chain in Sweden.
The company sells small to mid-sized consumer electronic goods, accessories (such as headsets and phone cases), electronic parts, and small home appliances.
With more than 80 stores, the firm employs a direct sales force of about 350 employees who are compensated with a fixed salary plus a variable tiered commission, which ranges up to around 2%, based on sales performance surpassing a preset quota.
Monthly quotas vs daily quotas
Traditionally, sales people have been compensated based on monthly quotas, and that plan was kept in place at five stores to serve as the control group in our experiment. These stores were selected as a representative sample of different geographic locations (Stockholm, Gothenburg, and Malmo) across Sweden.
For the remainder of the stores, a daily quota (more temporally frequent) plan was implemented for the entire month of May 2015.
Our hypothesis was that an increase in the frequency of the quotas would provide more continuous motivation. Under a monthly plan, sales people who started off the month poorly might become less motivated after realising they weren’t going to make their quota for that month – in essence giving up in the current month.
Daily quotas would theoretically help prevent such behaviour. On the other hand, daily quotas could potentially increase people’s anxiety and stress, eventually leading to a decrease in their performance.
Or, they might subtly encourage sales people to become overly aggressive, selling items that customers don’t need, thus resulting in an increase in product returns.
Daily quotas fo improve sales productivity, however…
As it turns out, we found that daily quotas did indeed lead to a significant increase – almost 5% – in sales productivity. Moreover, we found that the improvement was particularly striking for low-performing sales people.
Specifically, the bottom quartile of performers experienced a substantial 18% boost in productivity. The reason is because, as expected, daily quotas seemed to help prevent those individuals from giving up for the rest of the month after having a slow start, which is typically the case for low performers.
We found no evidence of overly aggressive sales behaviour under the daily plan; that is, our data indicated no increase in product returns. Instead, we found quite the opposite.
With daily quotas, sales people tended to sell more quantities of low-ticket items, probably a result of shifting their mindset toward the smaller daily goals.
Even the high-performing sales people shifted their focus toward selling low-ticket items. This change led to an overall decrease in returned merchandise.
The accompanying drawback, unfortunately, was the corresponding decrease in the sales of higher-margin items, a result that hurt the firm’s profitability.
Taken together, our findings strongly suggest that companies need to consider a number of factors when designing a sales compensation plan based on quotas.
A change in quota frequency can have unintended consequences, for example, leading to the sales force focusing on certain types of products at the expense of others. The industry context matters too.
Our research was in a retail setting and concerned items with relatively short sales cycles. Products with much longer sales cycles – aircraft, capital equipment, and so on – might have entirely different dynamics with respect to sales quotas.
Take care
When designing a compensation plan involving quotas, sales managers have to think first about the outcome they want. If it is simply more sales, especially for the low performers, a more frequent quota plan may be the way to go. If the quality of the sales matter, then giving more time for sales people to sell items may be necessary.
© 2018 Harvard Business School Publishing Corp.
