By Doug J. Chung & Das Narayandas
Firms often struggle with finding the best way to motivate their sales force. How much of a sales rep’s compensation should consist of a fixed salary and how much should be based on commission? What’s the effectiveness of bonuses and other incentives? In a recent study, we focused on sales quotas. More specifically, what should be the appropriate frequency of quotas—daily or monthly?
We conducted a large-scale field experiment at a major retail chain in Sweden. With more than 80 stores, the firm employs a direct sales force of about 350 employees who are compensated with a fixed salary plus a variable tiered commission.
Our hypothesis was that an increase in the frequency of the quotas would provide more continuous motivation. Under a monthly plan, salespeople who started off the month poorly might become less motivated after realizing that they weren’t going to make their quota for the month. Daily quotas would theoretically help prevent such behavior.
We found that daily quotas did indeed lead to a significant increase—almost 5 percent—in sales productivity. The improvement was particularly striking for low-performing salespeople: They experienced an 18-percent boost in productivity.
With daily quotas, salespeople tended to sell more quantities of low-ticket items, probably as a result of shifting their mindsets toward smaller daily goals. Even the high-performing salespeople shifted their focus toward low-ticket items.
The drawback, however, was a corresponding decrease in sales of higher-margin items, which hurt the firm’s profitability.
Taken together, our findings strongly suggest that companies need to consider a number of factors when designing a sales-compensation plan based on quotas. A change in quota frequency can have unintended consequences.
Doug J. Chung is an assistant professor of marketing and Das Narayandas is a professor of business administration at Harvard Business School.