Home > General > Do Quotas Help or Hurt the Bottom Line?

Do Quotas Help or Hurt the Bottom Line?

December 23, 2009 Leave a comment Go to comments

Quotas are the industry standard for motivating sales employees to sell. In an industry where employee effort can only be measured in how much money they make, quotas have always appeared to be the most efficient way to gauge progress.

But could quota incentives be actually undercutting profit?

According to a new study from Stanford’s Graduate Business School, quotas can, if not implemented correctly, do more harm then good. Harikesh Nair, an associate professor of marketing at Stanford and one of the authors of the report, says that certain quota structures can cause “gaming” behavior.

Nair explains, “there is no free lunch in salesforce compensation design: Pne can make a plan very incentive heavy in order to induce sales agents to work harder. However, the same features, if not designed correctly, can produce harmful gaming behavior, which negates the positive benefits the incentives were designed to produce in the first place.”

Here’s how such a gaming system can have negative effects on the bottom line: If an employee has already reached their quota, they will be less likely to continue to sell. In addition, if an employee is nowhere near the quota, they may hold onto prospects until the next quota cycle.

In essence, employees will cheat the system for their own gain. Yet there is no simple way to calculate the employees’ efforts outside of these output numbers. Nair’s study shows how output data can be used to refine an individual company’s incentive system and cut down on wasteful spending.

The Fortune 500 contact lens company that cited in the study found that when it cut the quota program, its profit increased by $1 million a month. This success might cause companies to start slashing their quota programs, but Nair warns: “striking the quota system may not be the answer for every company.”

“Instead, the key message is that managers need to carefully monitor how a given system is working for their organization.” [I can add emphasis like that, right?]

In this situation, Nair and his partner, Sanjog Misra, an associate professor of marketing at the University of Rochester, researched each sales person on the team and designed a specialized incentive program for this particular salesforce.

Based on the results of the research, Nair and Misra forged a new incentive program informed by the salesforce’s model. The new program, in addition to increasing profit by about $1 million a month, was also widely accepted by the employees, according to Nair.

The basis of Nair and Misra’s research is salesforce’s reaction to changes in the incentive programs. It uses two different methods: A mathematical strategy that combines agency theory and dynamic programming, as well as an analytical look at the company’s sales data history. The report credits this new approach as a “new rigorous and practical method to analyze and improve sales force compensation schemes.”

Nair hopes the study will cause companies to examine their incentive programs more closely and hopefully cut some unnecessary incentive spending.

“Our end goal with the article is to make firms reflect more deeply about the delicate balance between the provision of incentives versus the gaming behavior this induces.”

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