This blog post is the first in a three-part series analyzing important research in sales compensation.
In 2012, Michael Ahearne and Thomas Steenburgh published the results of several sales compensation research studies in the July issue of Harvard Business Review. Their article was the most comprehensive of our time, revealing research on caps, interim sales bonuses, overachievement commissions and many other plan features.
Even more research has been done since that paper was published. In this blog series, I aim to share insights from some pivotal research over the years, along with my analysis.
A June 2018 Journal of Marketing Research article highlights research showing that non-cash incentives (such as travel and merchandise) are more effective in driving sales results than cash-only incentives. Specifically, when a company switched from cash and merchandise incentives to all cash (of equivalent total value), its sales results dropped 4.4%.
This may seem counterintuitive if you only ask your sales force if they want cash or merchandise. Inevitably, the majority will say cash. Cash provides them the flexibility to spend the money how they want. But if you look at all of the research over the years, the result is clear and consistent: Merchandise outperforms the equivalent cash value when it comes to motivating behavior and higher results.
Albeit a bit older, a 2009 study published in the Journal of Economic Psychology supports this finding. The researchers split participants into two groups and established different incentives: One received $1,500 in cash, and the other received several merchandise options with a $1,500 cash value (a five-day cruise, an Apple laptop, an HDTV). At the end of the study, participants were asked to rate how enjoyable the reward was, how satisfying the reward was, and how happy they were to receive it. The merchandise scored higher on all three dimensions.
In addition, there was a third group that was given the option of choosing cash or merchandise. While the majority chose cash (as we would expect), the merchandise received higher scores on the three dimensions.
In another older study, Goodyear Tire and Rubber Co. ranked its 900 stores by volume, and then split them into an “even” group and an “odd” group. The researchers offered a cash reward to one group and merchandise/travel to the other group. The results were the same as the other studies. The merchandise and travel group showed 46% better performance and the program resulted in a 31% ROI. The cash-only group ended the study in the red, with a -20% ROI.
At first blush, you may think that an all-cash incentive program is the way to go. It’s what salespeople ask for and is simpler and less costly to administer, but when you look deeper at the motivational value of cash vs. non-cash, the non-cash outperforms from a motivational standpoint in every study. After all, it’s more socially acceptable to put your HDTV on the living room wall to convey your success as opposed to your W-2 earnings statement.
For more on the latest research, please join the ZS keynote session at the 2018 Spotlight on Sales Compensation conference in Chicago on Aug. 21.
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