FEATURE | SALES INCENTIVES
FOLLOWING THE MONEY PETER COLMAN presents the first in a series on behavioural economics in sales management – reacting to biases to grow profits
“Show me the incentive and I’ll show you the outcome”
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his famous quote from Charlie Munger gets straight to the point regarding the behaviour of individuals (and companies), and as vice chairman of the hugely successful US investment firm Berkshire Hathaway, he is certainly someone who understands how this links to long-term financial gain. Nowhere do incentives play a bigger role than in the steering of a salesforce, with its successes and failures impacting heavily on earnings. Given their importance, how can sales leaders and their remuneration committees galvanise their salesforce to outperform the competition and increase profits? As businesspeople and leaders, we’d like to think that our decision-making is wholly rational. Unfortunately, studies of how people make decisions – the hot topic of behavioural economics – show that this is often seen not to be the case. We are heavily influenced by a range of biases that can cause irrational and often detrimental actions. If we want to run a smart sales incentive scheme, it is important to consider these biases during their design. As a topline-focused consultancy, we at SimonKucher are asked to conduct many commercial excellence programmes every year. Consequently, we are frequently called on to assess our clients’ sales incentive schemes. Here, we’ll cover a few of the biases we have most frequently observed, and consider how sales organisations can either counteract them or deploy them, depending on their usefulness.
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BIASES TO COUNTERACT 1. “REVENUE IS VANITY, PROFIT IS SANITY” (ATTRIBUTE SUBSTITUTION BIAS) “It’s crazy. My previous firm paid me on gross margin; here it’s revenue. I’ve told the management at least twice that they should change it but they haven’t listened. So what am I supposed to do? I want to stay top so I’m going to beat my quota!” This was a direct quote from a client interview I conducted with the leading salesperson at a large manufacturing company. We hear things like this on a regular basis. While remuneration committees usually want to increase profitability, profit-based incentive metrics can seem complicated. Substitution for a revenue-based metric seems like an easy option, but this assumes that salesforce behaviour will remain similar. The reality in most cases is that this gives little reason for the salesforce to fight for higher prices (see box opposite, “Do the maths”), so deals get closed through discounts in order to move on to the next prospect quickly. As price is every company’s strongest profit lever, this discounting behaviour results in a damaging effect on the firm’s bottom line profitability. 2. “A SALES PLAN FOR SALESPEOPLE BY SALESPEOPLE” (DUNNING-KRUGER EFFECT) Creating good incentive plans requires a considerable amount of work to be done in both the plan design and the financial modelling. If ISMPROFESSIONAL.COM
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