Page 172 - HBR's 10 Must Reads - On Sales

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incentive payments. That finding was significant, because quotas
and bonuses are a large part of most sales compensation plans.
In 2011 Sanjog Misra, of UCLA, and Harikesh Nair, of Stanford,
published a study that analyzed the sales comp plan of a Fortune
500 optical products company. In contrast with the firm Steenburgh
studied, this company had a relatively simple plan: It paid a salary
plus a standard commission on sales after achieving quota, and it
capped how much a rep could earn in order to prevent windfalls from
really big sales. Such caps are relatively common in large companies.
As they analyzed the data, Misra and Nair concluded that the cap
was hurting overall sales and that the company would be better off
removing it. They also determined that many reps’ motivation was
hurt by the firm’s practice of ratcheting. Setting and adjusting quo-
tas is a very sensitive piece of the sales compensation formula, and
there’s disagreement over ratcheting: Some feel that if you don’t
adjust quotas, you’re making it too easy for reps to earn big com-
missions and bonuses, while others argue that if you raise a person’s
quota after a very strong year, you’re effectively penalizing your top
performers.
Misra and Nair estimated that if this firm removed the cap on
sales reps’ earnings and eliminated quotas, sales would increase by
8%. The company implemented those recommendations, and the
next year companywide revenue rose by 9%.
A third empirical study of sales rep pay, on which I am the lead
author, was published in Marketing Science in 2014. Like Steen-
burgh, we utilized data from a B2B office equipment supplier with
a complex compensation plan. We examined how the components
of the plan affected various kinds of reps: high performers, low per-
formers, and middle-of-the-road performers.
We found that although the salary and straight commission af-
fected the three groups in similar ways, the other components cre-
ated different incentives that appealed to certain subsets of the sales
force. For instance, overachievement commissions were important
for keeping the highest performers motivated and engaged after
they’d hit their quotas. Quarterly bonuses were most important
for the lower performers: Whereas the high performers could be

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