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Economics 101: To increase sales, create an incentive. Take a look at these 3 tips to help you improve your incentive structure...

June 20, 2019

 

 

 

There is a simple lesson taught in any entry-level economics course: if you want to increase activity, create an incentive. Incentives are proven to work — just take a look at taxes. Sin taxes are effective in deterring a certain behavior (soda taxes and cigarette taxes), and tax incentives encourage good behavior (charitable giving being an example.)

 

There are two types of incentives/motivators: intrinsic incentives and extrinsic incentives. Intrinsic incentives are discovered through personal motivation, with no outside pressure, and typically, that person is performing some task to achieve personal fulfillment. Extrinsic motivators, the focus of this article, means the chasing of some reward and is effective for salespeople within your organization.

 

A Harvard Business Review article titled “Motivating Salespeople: What Really Works” took a deep-dive into various motivational methods sales executives are using in an attempt to engage their teams and increase performance.

 

Here is a summary of their findings:

 

No-cap commissions increase revenue

Sanjog Misra and Harikesh Nair studied the effect of compensation plans and commission capping at a contact-lens manufacturer. They discovered salespeople stopped making sales once they achieved their maximum commission payout. The finding makes sense: people typically don’t work harder without any reward. Misra and Nair noted that when the manufacturer altered their compensation plan and allowed unlimited commissions, the company’s revenue increased 9%!

 

Overachievement Commissions Are Effective

Overachievement commissions boost income rates after quotas are met. For example, salespeople may earn 10% on the dollar with their regular commission rate until quotas are reached, but earn 20% on the dollar for all sales above quotas. Overachievement commissions are designed to keep the best employees engaged throughout the entire year. In fact, removing these commission structures from compensation plans reduces sales by approximately 17%.  

 

More winners=better performance

A 2014 study found that incentives with multiple winners boosts effort and performance better than incentives with winner-take-all gift structures. Noah Lim, one of the co-authors on the study, has done further work demonstrating that more (rather than fewer) gifts or rewards should be awarded as talented sales employees rise in an organization.

 

His findings show that “executives should offer at least as many gifts as there are stars in a sales force. The reason is intriguing. Increasing the number of gifts in an incentive increases the chances that a laggard or a core performer will win a gift in place of a star, which motivates stars to work harder. On the whole, these results show that frugality toward top salespeople is detrimental to firm performance.”

 

The Harvard Business Review shows the best way to motivate sales people and increase company-wide revenue is by creating positive incentives allowing sales departments to earn more money and compete for travel packages/gifts.

 

 

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