Page 166 - HBR's 10 Must Reads - On Sales

CHUNG
Idea in Brief

The Research multiple components (such as
various kinds of bonuses and com-
In the past decade, researchers missions) can engage a broad
studying sales force compensa- range of salespeople.
tion have been moving out of the
lab into the field, doing empirical The Implications
analysis of companies’ pay and
sales data and conducting experi- Many companies use experiments
ments with actual reps. to improve pricing, marketing,
and website design. Because sales
The Findings
compensation is a large expense
Companies sell more when they and sales force effectiveness is a
remove caps on commissions; primary revenue driver, companies
“ratcheting”—raising a rep’s quota should apply analytics and experi-
after a good year—dampens mo- mentation to find better ways to pay
tivation; and a pay system with and motivate their salespeople, too.

knowledge not only will help companies think about better ways to
compensate salespeople, but also might mean that their managers
spend fewer hours listening to them gripe about unfair pay.

The Dangers of Complex Compensation Systems
Researchers studying sales force compensation have long been
guided by the principal-agent theory. This theory, drawn from the
field of economics, describes the problem that results from con-
flicting interests between a principal (a company, for instance)
and an agent hired by that principal (an employee). For example,
a company wants an employee’s maximum output, but a salaried
employee may be tempted to slack off and may be able to get away
with it if the company can’t observe how hard the employee is
working. Most incentive or variable pay schemes—including stock
options for the C-suite—are attempts to align the interests of prin-
cipals and agents. Commission-based plans for salespeople are just
one example.
Salespeople were paid by commission for centuries before econo-
mists began writing about the principal-agent problem. Companies

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