Do Incentive Plans Really Drive Performance?
By Team Artha
In one’s early years of organizational life, one can’t be faulted for concluding that every problem can be fixed by an appropriately designed incentive plan. You were fresh out of college, where you were conditioned to believe that the world is rational and everyone has been wired to maximizing their value. We were all told that Adam Smith’s proverbial invisible hand drove the free market. It is only after one has been exposed to the ground reality for a sufficiently long period of time does one figures out that the reality on the ground is different from the assumptions that economists made in their rather simplistic models. Startups are much more prone to failures on this front because they do not have the advantage of experience with what does not work on the ground and hence tend to go through the whole cycle of trial and error.
Some of these statements may sound familiar:
“Our incentive plan is not driving the right behaviours”, “Our sales staff don’t believe this incentive plan can help us meet next year’s stiff targets”, or “Our delivery folks need to be incented for driving account growth”. “Our warehouse staff needs to be incented to turn up on days when there is peak demand”.
Irrespective of what the problem was – skill set of the individual, manager’s competence, or lack of role clarity – the solution proposed invariably centred around the creation or tweaking of an incentive plan. There’s been substantial debate on what incentive plans really accomplish. What are the objectives with which incentive plans are designed and implemented?
Do incentive plans help retain talent in a competitive market? Do they help align managerial remuneration and wage bill (a significant chunk of the cost) with a company’s performance? Do they drive performance and ultimately reduce the cost to revenue ratio? Do they simply serve as a motivation tool?
It’s helpful to understand what incentive plans can achieve and what they can’t.
My experience in implementing incentive plans and active involvement in the associated debates leads to some interesting conclusions:
Do Sales Commission Plans work?
Sales commission plans are structured with two primary objectives:
Great sales leaders completely understand that the right sales skills are what drive sales, period. Incentive plans just act as the proverbial icing on the cake. Therefore, they don’t spend too much time on ‘engineering’ the commission plans and instead spend almost all their time coaching their sales reps and building a great sales team – a good part of which is letting go of those that are not shaping up and hiring new ones. The sales function, more than any other function, needs constant churn and clean up to maintain a healthy ability to deliver results. If you see your sales head spending time on engineering sales commission plans, you have a serious problem on hand.
Selling at startups is very different from selling at large mature companies.
A lot of the selling that happens at startups is driven by evangelistic founders. I have seen two startups where sales leaders who came with a terrific track record at large companies fail spectacularly. One was a niche provider of IT services that also had aspirations for product development and consulting. They didn’t see themselves as just another low-cost provider of services. This startup had graduated to a stage where it was critical to hire a global head of sales. They hired someone who had led large global sales teams at a large and respected provider of IT services. The failure stemmed from this individual’s inability to deeply understand why clients bought from the company he had just joined and how this company was different from the much bigger players in this space. He continued with the same spiel he dished out when he was with his previous company. He struggled to adapt and make changes to his selling style. He was not sufficiently hands on either, and over a period of time, the founders as well as the rest of the culture torchbearers in his new company found it difficult to relate to him. What the founders had expected was someone who understood the discipline and rigour of the sales process well but could adapt to a different domain and a fundamentally different value proposition. The second example is of a provider of knowledge services in the research space. This startup, too, was at a stage where it was critical to hire a global head of sales. They hired someone who had led large teams at reputed American MNCs. In the final analysis, in this case, too, both the outcomes and the underlying reasons were exactly the same as in the previous case. Both the new heads of sales had to leave within a year.
I have often seen managers trying to substitute elementary management processes with incentive plans, hoping they’d work. They don’t eventually. Oftentimes, when managers ought to be conducting better reviews, having difficult conversations, teaching their team members how to do a job better, communicating expectations, or providing direction and coaching, they suggest implementing an incentive plan. It’s not difficult to fathom why. By suggesting that an incentive plan should be put in place, they are buying time, and if things do not work, the problem was with the plan design! The subsequent discussion goes somewhat like this, “can we try and tweak the plan? Maybe we should have a sharper payout ratio for achievement beyond the target? Or should we have a threshold up to which we do not pay an incentive?” Well designed incentive plans in the right context and with the right objective and expectation is a perfectly smart thing to do, but using incentive plans to solve for more fundamental management failures can be setting of a culture of a weak-kneed approach to dealing with problems.