“Our salesforce compensation scheme needs to be all-cash. We will be more profitable and more efficient.”These were the thoughts running through the mind of Clifford James, the new VP of Sales for Crimson, a Fortune 500 company. Crimson relied a lot on salespeople – 676 of them – to run their national food business, so salesforce compensation was a big deal.
Crimson’s salesforce was paid a pure commission on sales and an additional bonus for exceeding targets. This bonus amount was a mix of cash and merchandise reward points. Those merchandise reward points were the focus of James’ attention. Salespeople could accrue points and then redeem them for a variety of goods provided by a third-party. These points, however, were expensive for the firm to maintain. Furthermore, most of the goods in the merchandise catalogue seemed to be pricier than equivalent options on Amazon.
James had talked to a few salespeople and they all strongly expressed a desire for more cash instead of the merchandise reward points. On the face of it, there appeared to be no economic reason to continue with the merchandise incentives. It was costly for the firm; the value of the goods was not great; and some salespeople had explicitly said they preferred cash.
Despite all that, James somehow felt he needed more validation. As he learned, that gut instinct led to a wise decision when behavioral experimentation came into the picture. James reached out to Xiaolin Li, Om Narasimhan, George John and me to design and conduct a rigorous intervention that examined the value of merchandise rewards program. The intervention would hopefully allow him to monitor performance and identify the cause for the changes in performance with a reasonable degree of certainty.
Our intervention provided significant new evidence in a real-life context, on a scale larger than that of previous studies and in an earnings context too.
With the support of the organization, my coauthors and I changed its reward program from cash and merchandise to all-cash at an equivalent value. We paid careful attention to the timing of the change as well as the information provided to salespeople. In order to reduce the probability of salespeople changing their behavior in response to the compensation changes, we gave no advance notice or any specific reasons for the change. Sales behavior across the salespeople was then monitored for the next six months and compared with their performance three months prior to the start of the experiment.
As a result: sales declined 4.36% over the nine-month duration of the experiment.
In other words, the switch from a cash/merchandise program to an all-cash reward program resulted in a sales decrease of 4.36%, which cost the firm millions of dollars in lost sales. Further statistical analysis seemed to suggest that the drop in sales was accompanied by a corresponding and highly significant drop in sales effort. In addition, it turned out that the decline in sales and effort was most pronounced among high-performing salespeople. In fact, the size of the sales drop increased from lowest performers to highest.
We checked and double-checked. Sales declined when the bonus was moved from a plan with merchandise reward points to an all-cash plan, and this drop was highest among top-performing salespeople.
In a follow-up survey to ascertain possible motives, we found a few more surprising things.
- When asked to evaluate preferences between cash and merchandise reward points, salespeople expressed a strong preference for cash rewards, which was contrary to their observed behavior.
- Salespeople who spent more of their household income on discretionary expenditures like entertainment, restaurants, gifts and electronics saw a bigger drop in sales effort and sales than those who spent less on discretionary income. This seemed to suggest that salespeople who have greater slack on their regular household expenditure (less non-discretionary and essential expenditure) prefer merchandise reward points over cash.
- Salespeople who view cash more abstractly – i.e., they think more about the multiple functional uses of money – saw a smaller drop in sales. (We found no difference in preference between compensation types based on household size, redemption frequency or type of good redeemed.)
People may say one thing but then behave very differently.
These were all interesting findings to James. Despite what his salespeople said they preferred, they expressed their preference for merchandise rewards in practice by exerting more effort and achieving higher sales when rewarded with both merchandise and cash. Further, the drop in sales and effort was higher among top performing salespersons. That said, the preference for merchandise rewards was not uniform. Salespersons’ chronic attitude towards cash and their family expenditures appeared to influence their preference.
James was familiar with work on mental accounting that had shown merchandise rewards work differently than cash rewards, but most of that work was on a limited scale, in labs and focused extensively on consumer experiences. Our intervention, on the other hand, provided significant new evidence in a real-life context, on a scale larger than that of previous studies and in an earnings context. The takeaways to James were clear – merchandise rewards motivate salespeople but may not work equally well for everyone.
The takeaways to James were clear – merchandise rewards motivate salespeople but may not work equally well for everyone.
He also realized that people may say one thing but behave differently. That’s something he could consider while designing his next changes to his compensation plan.
We’re glad James reached out to us to help him test his intuition, and we can’t wait to see what he does next.