Why sales incentives just don’t work (part one)

The experimental data spanning decades indicates sales incentives actively harm the performance of sales and marketing teams. Yet most pharmaceutical companies continue to persist with this antiquated model in the futile hope that it could help improve sales performance. Others believe it is essential to have a healthy sales incentive to even meet target. One brave multinational has just abandoned individual sales targets and sales incentives. Is this the beginning of the end of the sales incentive? Rob Dickerson former Menarini Sales Director discusses.

A search of 'sales incentives' on Amazon brings forward 5,062 books on the subject. It seems the vast majority of organisations believe it is essential to provide incentives in order to maximise the sales force potential. There is also a trend to make incentive payments available across all levels of organisations.1 As sales and marketing costs now seem to be overtaking R&D expenditure2 it makes sense to maximise this costly component of brand commercialisation.

But what if sales incentive payments were actually lowering performance? With so many books and so many consultancy experts offering the best practice model for sales incentives is this even possible? The objective evidence indicates performance-based sales incentives decrease results as well as increase operating costs. In an era where downsizing has become the norm as a way of increasing the profits one competitive advantage may be to remove one of the largest barriers to sales force success – the sales incentive.

Much has been studied in the past regarding motivators for individual performance. Often financial rewards are ranked quite low as a personal motivator. When self-reporting, individuals often rate financial rewards as ninth or lower as an important motivating factor.1 Yet our first impulse is often to offer more money as a way of motivating the field force.

Sloan Professor of Behavioural Economics at MIT, Dan Ariely, states money is very often the most expensive way to motivate people and social norms are often more effective.3 Ariely describes social norms as the friendly requests we make of each other and are closely linked to our need for community. Furthermore, when we introduce what he calls 'market norms' (aka money) the social norms are driven out. The implication from Ariely's research is that the request to do something is far more powerful that the offer of a financial incentive to complete a task.

That's not to say financial incentives don't always work. They do work in specific situations where the tasks are repetitive and straight forward – like in a factory production line.4 Stanford Professors Jeffrey Pfeffer and Robert Sutton caution that when the task required is even moderately complex it can be impossible to think up every way to achieve the goals. Brand management, sales management and even today's sales representative role can be highly complex and therefore not a good fit for financial incentives as a way to motivate. But it's not just a matter of the offer of financial rewards being an ineffective motivator – it can seriously decrease motivation and hence performance.

It's interesting to look at some historical events in behavioural psychology that led to and reinforced extrinsic financial rewards beyond base salary. In the early 20th century the Russian physiologist, Ivan Pavlov, developed the theory of classical conditioning based on his observations on dogs. The American psychologist B.F. Skinner built on the work of Pavlov. Skinner developed the theory of operant conditioning which simply stated says that behaviour which is reinforced tends to be repeated (or strengthened) and behaviour which is not reinforced tends to die out (or be weakened). This led to the observation of positive reinforcement using rat experiments.5,6 Extrapolating from this, the corporate world learnt to offer financial incentives as a way of providing positive reinforcement for task completion. Skinner retired in 1974.

Yet in 1950 Professor Harry Harlow published a paper not only demonstrating a phenomenon called intrinsic motivation but also evidence to show that when rewards were introduced performance was adversely affected.4 In other words people can be intrinsically motivated to complete tasks because they are personally interested. When an incentive is offered for the same task we can lose interest and perform more poorly at the task. Still, the general consensus pre 1970 was that external rewards could control behaviour.7

Then in 1971 Edward Deci (now Professor of Psychology at the University of Rochester) published Effects of externally mediated rewards on intrinsic motivation. This peer reviewed paper contained more compelling evidence that some activities provide their own inherent reward so motivation for these activities is not dependent on external rewards. For the following forty years many experiments were performed examining how humans can be immensely motivated without extrinsic rewards. And most importantly, when extrinsic rewards are provided they can significantly decrease the individuals desire to perform the task.

Perhaps the most compelling evidence can be found in a thorough examination of the data spanning a quarter century. Edward Deci, Richard Koestner and Richard Ryan published a meta-analysis of 128 studies examining the effects of extrinsic rewards on intrinsic motivation. These three professors, and experts in the field of motivation, concluded that tangible rewards tend to have a substantially negative effect on intrinsic motivation.7 Some key findings of the meta-analysis were:

• The negative effects were particularly strong when the tasks were interesting or enjoyable rather than meaningless.

• For every standard deviation increase in reward, intrinsic motivation for interesting tasks decreases by about 25%.

• When rewards are tangible and foreseeable intrinsic motivation decreases by 36%.

• Even when rewards are offered as indicators of good performance they still decrease the motivation for interesting tasks.8

So the experimental data says extrinsic rewards decrease performance. Yet sales incentives are so entrenched in the pharmaceutical industry they are almost viewed as another hygiene factor. In part two of this article we'll review which innovative multinational has made the break away from sales incentives and why this is aligned with evidence based management. We'll also look at some feedback from representatives I have managed. Perhaps now might be a good time to seek feedback from your teams regarding motivation and sales incentives. The lack of desirable behaviour change may surprise you.

Part two of this article can be viewed here.

General references

1. Pfeffer, J. & Sutton, R.I. (2006). Hard facts, dangerous half-truths, and total nonsense: Profiting from evidence-based management. Boston: Harvard Business School Press.

2. http://www.fiercepharma.com/story/does-pharma-spend-more-marketing-rd-numbers-check/2013-05-21

3. Ariely, D. (2008). Predictably irrational: The hidden forces that shape our decisions. New York: HarperCollins.

4. Pink, D.H. (2009). Drive: The surprising truth about what motivates us. New York: Riverhead Books.

5. Butler-Bowdon, T. (2007). 50 psychology classics: Who we are, how we think, what we do. Insight and inspiration from 50 key books. London: Nicholas Brealey.

6. http://www.simplypsychology.org/operant-conditioning.html

7. Deci, E.L., Koestner, R. & Ryan, R.M. (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin, 125, 627-668.

8. http://blogs.hbr.org/2013/04/does-money-really-affect-motiv/

About the author:

Rob Dickerson has a reputation for driving strategic change and building formidable teams. He has worked in senior roles in Sales, Marketing and Learning & Development in the Asia Pacific region. In his role as Sales Director for Menarini, his Australian national team has been independently voted as Best Sales Team in the industry for the past four consecutive years. He is sought out as a regular speaker and MC at industry conferences.

Now residing in Switzerland, Rob can be reached via the following contacts:

Email: rob.dickerson@bigpond.com

LinkedIn: http://au.linkedin.com/in/robdickerson1/

Twitter: @RobertDickerson

Mobile: +41 7923 79531

Closing thought: In your opinion, are sales incentives a waste of time and effort?