• October 14, 2008
  • By Leslie Stretch, president and CEO, Callidus Software

Big Incentives Can Drive Bad Behavior

The concept of “pay for performance” is generally accepted as gospel. However, while the concept is an easy one to understand, executing on this idea is a different story. The reality is that pay-for-performance policies often fail to generate the stellar performance they're designed to produce.

When sales teams aren’t encouraged to sell the way you need them to sell -- that is, to sell products and services strategically, in order to meet business goals -- they’ll inevitably fall back on their own goals to guide them in the sales process. For instance, their only goal may be to close the deal as quickly as possible, often at the expense of gross margins and customer satisfaction.

Direction for sales teams needs to be reinforced at the executive level, and teams also need to stay nimble as directives change. (A wobbly economy, for example, is hardly what you'd consider an optimal sales environment. Tactics and goals may need to be adjusted.) If you fail to align sales with corporate objectives, and ensure that the sales teams can truly carry out these objectives, you’re risking more than your quota -- you’re risking your revenue.

Here’s a cautionary tale of what happens when the hunger for commissions runs amok, and sales teams don’t sell with an eye on the corporate goal: In mid-2007, when Apple's iPhone first went on sale, exclusively through AT&T, sales staff at AT&T locations told consumers that if they wanted to buy an iPhone, they also had to buy a pile of add-on accessories. Unfortunately, this wasn’t true -- but salespeople were being penalized when they didn’t sell enough accessories. From their perspective, pushing the add-ons was the only way to fatten their commission checks and save their jobs. (An embarrassed AT&T later had to tell consumers they could return the unwanted products for a refund.)

As part of a sales-driven organization, you need to prevent the circumstances that invite such unorthodox sales practices, since they do nothing to help you achieve overall goals. Here’s another example of sales strategies gone awry: Recently, a friend was haggling on the price of a car, and the salesman agreed to cut her a deal -- but only if she filled out a customer satisfaction survey and gave the salesperson top marks. While this tactic leads to top grades from the customers for the staff, it also means lost revenue. It’s easy to predict that the chief financial officer of that dealership was most likely scratching her head, trying to figure out why revenue was dwindling.

Multiply individual sales decisions -- like the one made by this car salesperson -- by the thousands, and you begin to see why misdirected incentive payments can’t drive the sales behavior that drives revenue.

The negative impact on a business caused by misdirected incentives isn’t limited to front-line salespeople. A few years ago, Fannie Mae was in the hot seat because its executives were compensated when earnings were high, with no corresponding penalty when earnings dropped. The result: Executives had an incentive to falsely inflate earnings -- which they did, to Fannie Mae’s great detriment.

Fortunately, sales executives that want to avoid the risk of misdirected incentives crippling the business can adopt some key compensation strategies:

  • Be agile and nimble -- and avoid the Armada syndrome. If you’re agile and nimble, you’ll quickly react to poor-performing sales teams with new incentives that bring behavior back in line with business goals. Too slow to change tactics? There goes your share price.
  • Burn the spreadsheets -- and eliminate legacy systems. Static, outdated spreadsheets don’t let you do the necessary detective work to spot sales behaviors that need to be stamped out. Automate compensation management so that the fate of your business doesn’t rely on an error-prone spreadsheet.
  • Don’t incentivize in a vacuum. You need visibility into sales behaviors on a moment’s notice. If you’re really intent on directing the right behaviors, then getting reports weeks or months after a sales campaign ends does no good. Model and test your proposed incentive programs so that an unintended effect -- like AT&T salespeople pushing iPhone accessories -- doesn’t catch you by surprise.

About the author
Leslie Stretch, president and CEO of Callidus Software, has 20 years of experience in building long-term customer and business-partner relationships in the technology industry. Prior to joining Callidus Software's executive board, Stretch worked for Sun Microsystems for nine years.

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