What’s the right kind of bonus to

motivate your sales force?

by Doug J. Chung and Das Narayandas

September 12, 2017

Companies typically compensate their sales force by using some combination of salary,
commission, and bonuses, but executives are often unsure of which incentives provide the best
motivation. For example, should bonuses be tied to quotas or should they be given
unconditionally? For a quota system, would it be better to use bonuses as a reward (giving them
to those who meet or surpass their quotas) or as punishment (taking them away from those who
fail to meet their quotas)?

To investigate these questions, we conducted a randomized field experiment at a large Indian

company that manufactures and sells consumer durable goods. The firm’s sales force consists
of over 5,000 people who are responsible for selling multiple product lines, including water
and air purifiers, vacuum cleaners, security systems, and ancillary services. In the experiment,
conducted over a six-month period in four urban cities (Delhi, Bangalore, Mumbai, and
Hyderabad), we assigned different weekly bonus schemes to 80 full-time salespeople. These
bonuses were substantial, representing about 27% of the monthly wage of an average
salesperson at this company, and they were awarded either conditionally, according
to performance, or unconditionally.

We assigned the salespeople to different bonus treatment groups. Some received conditional
bonuses, which we tied to sales quotas under three different treatments: standard, punitive, and
real-punitive. In the standard treatment, we gave a bonus payment after a salesperson achieved
a weekly sales quota that was set 20% higher than what that individual had previously sold.
The punitive treatment was identical except for the framing: We told salespeople that failing
to receive a bonus was a penalty for failing to achieve their quotas. And in the real-punitive
treatment, bonuses were awarded at the start of the week but then withdrawn for those who
didn’t meet their quotas.

Some people received unconditional bonuses, which were given irrespective of their sales
performance. The goal was to encourage reciprocity, whereby salespeople would increase their
work efforts in appreciation for the firm rewarding them with extra monetary compensation.
These bonuses were awarded under two different treatments: delayed and immediate. In the
delayed treatment the bonuses were communicated to the salespeople at the beginning of the
week, and payment was made at the end of the week. In the immediate treatment salespeople
were simultaneously informed of and awarded the bonus at the start of the week.

Analyzing the resulting data, we found that the conditional bonuses were, on average, more
than twice as effective as the unconditional bonuses. In fact, such conditional compensation
resulted in a sales increase of approximately 24%. But, interestingly, we found little evidence
of a difference between the standard and punitive treatments. This finding runs counter to loss-
aversion theory, which stipulates that people’s desire to avoid a loss will be stronger than their
desire to attain an equivalent gain. Our results also indicated that a conditional bonus could
potentially demotivate salespeople over time: Salespeople’s performance was higher during
weeks of a bonus treatment but lower in weeks after a bonus treatment. This result is consistent
with past behavioral research that has found that too much extrinsic motivation may actually
lead to a decrease in intrinsic motivation.

For the unconditional bonuses, we found that they were effective only when they were
distributed as a delayed reward. Awarding salespeople with bonuses at the start of a sales period
had no significant effect on their performance. It could be that, even though they were told
otherwise, the salespeople considered the immediate bonus to be compensation for their past
performance, instead of a reward for their future performance. Another interesting result was
that the effectiveness of the delayed bonuses appeared to decay when such a reward scheme
was repeated over time: The effect size became marginal toward the end of the field
experiment.

We also investigated how the various types of bonuses might affect people differently. We
found, for example, that the unconditional bonuses tended to be more effective for salespeople
with a higher base performance, which supports the idea that high performers generally have
more goodwill toward the company and thus are more likely to reciprocate by increasing their
selling effort. In contrast, the conditional bonuses were equally effective across all types of
performers.

Our results have implications for companies trying to more effectively manage their
salespeople. In general, sales force costs often represent the single largest investment for an
organization, averaging about 10% of sales revenues, and up to 40% in B2B markets. As such,
companies would do well to understand how best to motivate their salespeople, and to that end,
judicious bonuses can be an effective tool.

Unfortunately, in our field investigations, we found that executives often make decisions
about sales force compensation based on their gut feelings and past practices, not on
quantitative data. Before our experiment, the head of field sales and many regional managers
of the Indian firm predicted that the real-punitive approach would be the most effective. Yet
our results indicated that overall it was no more effective than the other conditional
compensations.

The lesson is clear: Sales force compensation is a tricky issue, requiring decisions based less
on intuition and conventional “wisdom,” and more on hard, quantitative data. We encourage
companies to periodically experiment with their compensation systems, such as we did, as there
is no clear-cut, magic rule for an optimal scheme. Firm and national culture are different, and
so are people.

Sales research article published in the Business Review. Available at

https://hbr.org/2017/09/whats-the-right-kind-of-bonus-to-motivate-your-sales-force.
[accessed on 11.12.2017]