In my book Without Warning, I state, “I’ve seen simple plans work and thoughtful plans implode. The evidence is clear: this area is ripe for silent problems to mataterialize, especially if done incorrectly.” Over the past year, I’ve reached the conclusion that compensation and incentive plans is one of the most difficult areas for HR and business leaders to develop and implement. Too often the activity you desire and the result you receive are in conflict with each other. To reinforce this thought, I found an article by Dan Pink (author of Drive) interesting and spot on. Here are a couple of the key take aways.
In the early days of the company, Davidson created a fairly straightforward commission scheme. But, of course, salespeople figured out a way to game it – by pushing sales into the time period most advantageous for them, by underselling one month to show a bigger gain the following month, and so on. This wasn’t because they were unethical; it was because they were rational humans responding logically to a particular incentive structure.
So Davidson made the system more complex – and salespeople responded by increasing the complexity of their own behaviour. On and on it went, until both the management team and the sales force seemed more focused on the compensation system than on making great software and selling it to customers who needed it.
“By their very nature, individual commissions discourage collaboration. Why help ‘Mary’ close the deal when she’ll get the gains from the sale?” says Weinstein. “The comp plan was dividing people.”
But at both Red Gate and System Source, once commissions were no longer around, collaboration and commitment increased.
In the end, an elaborate system of commissions might have been the problem rather than the solution.
“Imagine you could construct a sales robot, programmed solely by the rules in any sales structure,” Davidson wrote on his blog. “How would it behave? It would steal deals off other salespeople, sell customers software they didn’t need, argue with its boss over its commission and backstab its colleagues. That wasn’t the behaviour we wanted, but our commission structure sent a strong signal that it was.”
Should every company eliminate commissions for its sales staff? Probably not. But should entrepreneurs, managers, and the rest of us step back every now and again and question the supposedly fixed laws of the universe? Definitely.
Complexity and simplicity are strange bedfellows - especially when it comes to creating incentive and compensation plans. Most business leaders and managers regularly tweak their plans in an attempt to achieve the incentive-motivation Holy Grail. That place where incentives achieve the motivation and results desired. But as Dan Pink points out, just maybe we need to rethink our plans as individuals like Deming, Jacques and others have been suggesting all along.
What are your thoughts?
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