The Firm, the Managers and the Employees – Do their interests align?
Allen Benson examines how sales managers game the staffing and incentives of their subordinates and looks at the imperfect ability of organizational hierarchies to motivate employees to act on the organization’s behalf. The study examines data in 244 firms provided by on-demand (cloud) sales performance management software that personnel use to record credited transactions and track progress towards meeting quotas. “The service is designed to make incentives and real-time performance transparent to salespeople and their managers, to calculate and automate compensation, to enable monitoring, to produce an audit trail, and to promote flexibility in adapting compensation plans” (Benson, 870).
Quotas are specific performance thresholds, and rates for commissions and bonuses are typically expressed at intervals of a quota. Annual variable pay based on measured performance is about one-half of base pay for both managers and non-managers. Making quotas and other discrete benchmarks bestows prestige, influence and symbolic rewards (Larkin 2009). Firms typically guarantee a base pay, which reduces the risk of income volatility due to factors outside of an individual salesperson’s control and provides incentive to new recruits.
The benefits of quotas are widespread. First, they concentrate variable pay around marginal effort. Second, quotas define minimum acceptable performance, and consistently missing a quota is generally understood to be grounds for dismissal. Third, managers and compensation plan designers widely believe that quotas have a psychological effect on salesperson sorting and performance.
Sales functions devote considerable resources to identifying and retaining top performing salespeople. However, in many cases, it is difficult to attribute sales performance to the skill of a salesperson rather than to other factors such as product quality, territory, and market conditions. In sales hierarchies, information regarding salesperson ability and exogenous “luck” is rarely observed or communicated perfectly. It follows that managers who have private knowledge of workers’ abilities play a large role in staffing a high performing sales team. These managers also rely on a variety of reporting practices and tools such as CRM software to reduce information asymmetries, maintain incentive alignment and discourage gaming.
Benson presents two hypotheses related to the effect of managerial quotas on subordinate staffing and incentives.
Staffing Hypothesis: Quotas affect incentives for the timing of staffing decisions. Managers are better served keeping a poor-performing but experienced salesperson rather than hiring a new recruit in the short-run. Finding and training a new recruit to develop skills and establish a sales pipeline takes time – Benson suggests this ramp-up period for B2B sales typically lasts six to twelve months. Replacing a poor performer with a new recruit is an investment that involves the substitution of present sales with greater expected future sales as the new recruit is hired and ramped up. As such, retaining a poor performer is a way for managers to pull in sales from future periods. Therefore, being on the cusp of an annual quota encourages managers to retain poor-performing subordinates who would otherwise be replaced.
Incentive Hypothesis: Quota adjustments allow firms to adapt incentives to unforeseen circumstances. Because incentives for salespeople far below their quotas are weak, they might quit late in the game or hold off on sales until the next measurement period. Adjusting these incentives by making quotas within reach allows managers to boost immediate sales while risking future moral hazard and disillusionment as adjustments become expected and viewed as entitlements. For these reasons, quota adjustments are not routine.
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