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📝 Intro

About 50% of companies pay incentives to their sales teams (e.g. commissions, bonuses), for a total of $800 billion each year (data from 2012).

These incentives are mostly based on sales. Sell and you receive a commission. Fail to sell and you don’t.

But a small number of companies also give so-called activity-based incentives.

These are rewards for intermediate, measurable goals, such as booking meetings, prospecting (e.g. find 20 new leads per day), presenting (e.g. give 5 demos).

Are these companies doing something we should all be doing?

Let's take a look at this new study done in collaboration with McKinsey & Co.

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Previous tip: How to boost revenue with free samples (All tips here)

Give incentives to sales teams based on the calls they make, not only the sales they close

Impacted metrics: Customer acquisition | Customer spending
Channels: Sales
For: Both B2C and B2B
Tip type: New research (June 2021)

📈 Recommendation

Pay activity-based incentives to your sales team to boost performance and overall sales. 

These are incentives based on targets on certain sales activities. For example, client calls per week, new leads found, or presentations given.

They are more effective than only giving bonuses or commissions on final sales.

When given only to supervisors, but not salespeople, they are almost as effective as giving them to both. So give them only to supervisors to reduce your costs.

🎓 Effects

• Activity-based incentives are bonuses paid to individual salespersons based on measurable actions that are known to lead to sales (e.g. calls made). They are usually given along with incentives based on sales (commissions or bonuses).

• This study found that activity-based incentives increase the productivity of outbound sales teams, leading to higher sales.

• A 3-year experiment on the sales teams of a large South Asian pharmaceutical found that activity-based incentives:

  • For frontline supervisors only increased activity by 7%, leading to a between 6 and 9% increase in sales (depending on the data model used)

  • Forboth supervisors and salespersons caused a similar activity increase and an 8% sales boost

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🧠 Why it works

• When supervisors are given incentives based on the activity of their team, they have a stronger motivation to help their salespersons better plan their day-to-day activities.

• Typically, supervisors have extensive experience and were promoted to the role after being successful salespersons themselves for several years. 

• Because of this, they have a better understanding of the input needed (e.g. how many demos) to produce a certain output (e.g. number of closed sales).

• So incentivizing them to plan and monitor their team’s activities more closely helps them apply their experience to their team more effectively.

• Giving activity-based incentives to salespeople as well as to supervisors is, therefore, a ‘nice-to-have’ because they will anyway follow what their supervisor recommends, especially since it leads to results (and sales bonuses for everyone).

✋ Limitations

• The study was done on a single (large) pharmaceutical company. The advantage is that the effect is proven to work in the field. The disadvantage is that it makes it riskier to generalize to companies that are very different. These are the characteristics of the sales teams studied:

  • Their goal is to increase sales volume across a relatively fixed broad portfolio of customers (mainly pharmacies, both big and small)

  • They don’t have control over pricing (e.g. negotiating prices on a per-customer basis)

  • 35-40% of their pay is based on sales commissions

• It’s unclear what the broader consequences are for the increased attention and control supervisors are incentivized to have over individual salespersons. For example, it might take their time away from other activities such as hiring or could demotivate some of the employees who report to them.

• It’s unlikely to be useful to use activity-based incentives for roles that are already highly scripted and closely monitored (e.g. call centers).

• Activity incentives based on the work of their team could lead supervisors to ‘massage figures’ in their favor (numbers that they often directly control).

🏢 Companies using this

• Most companies already monitor these activities in sales teams (e.g. calls per week) and tend to enforce a minimum performance (e.g. if you don’t reach X number of calls for 3 weeks straight it’s a red flag).

• Only 15% of companies used activity targets in their incentive plans (data from 2006).

⚡ Steps to implement 

• Make sure supervisors are experienced enough to properly guide salespersons reporting to them. They should help them plan the right balance of activities to sell effectively (e.g. 30% prospecting, 20% demos).

• Ask them to identify sales behaviors that are predictive of good sales. These will depend on your industry. For example:

  • For selling prescription medicines to rural Indian pharmacies: phone calls

  • For B2B hiring software sales: demos booked

  • For complex industrial systems with long sales cycle times: appraisals made

• Set targets for each of these actions, and allocate a moderate part of supervisors’ compensation to be based on them (less than that coming from sales commissions).

🔍 Study type

Field experiment (of an undisclosed large pharmaceutical company in a South Asian country over 3 years with an average of 412 salespeople and 71 supervisors). South Asia

📖 Research

Rao, R. S., Viswanathan, M., John, G., & Kishore, S. (June 2021). Do Activity-Based Incentive Plans Work? Evidence from a Large-Scale Field Intervention. Journal of Marketing Research.

[Link to paper]

🏫 Affiliations

McCombs School of Business, University of Texas at Austin; Indian School of Business; Carlson School of Management, University of Minnesota; and McKinsey and Company. United States and India

Remember: Because of the groundbreaking nature of this paper, it could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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