How do you get the most out of a sales team? The simple answer is to give incentives to make sales: big commissions, healthy bonuses. But what if you must consider dimensions of the exchange beyond simply the initial sale – long-term customer satisfaction, for instance?
New research by K. Sudhir (Yale School of Management), Kosuke Uetake (Yale School of Management) and Minkyung Kim (University of North Carolina), demonstrates the need to consider “multidimensional” incentives when salespeople are given a range of responsibilities beyond simply making a sale.
Anchoring this work is data from a Mexican microfinance lender where salespeople are responsible for both securing customers and collecting loans. The researchers studied more than 200 salespeople over a 14-month period to capture the relationships between compensation and performance. “The empirical setting is ideal for studying multitasking because the loan officers at the bank are jointly responsible for both loan acquisition and loan maintenance,” the researchers write. From this baseline they built a model to understand the dynamics between the quality of employees’ work and their compensation.
Central among the findings is the idea that the salesforce can be divided into “hunters” and “farmers.” Hunters are relatively good at acquiring new customers, but they are also likely to acquire more low-quality customers. Farmers are better at collecting past loans relative to hunters, and they are less likely to acquire bad loans.
From this result the researchers reveal three key insights.
- Incentives should be “multiplicative.” That is, a salesperson gets one score based on the quantity of the customers they have acquired; they get another score based on the quality of those customers (judged by loan delinquency rates); then those two scores are multiplied together to inform their compensation. (This is in opposition to an “additive” incentive system, in which the two figures would be added together.)
This approach reins in the hunters’ tendency to acquire bad loans. Importantly, though, the finding depends on the balance between hunters and farmers in each firm. The microfinance bank comprised mostly hunters. If the balance were reversed, this finding may not apply, as the practice actually reduces the profitability of farmers, who end up spending more of their time trying to acquire loans – a task at which they are inefficient.
- Firms should not encourage specialization among hunters and farmers. If these groups can focus solely on what they’re good at, then hunters acquire more bad loans and firm profitability shows a marked decline. There are, however, ways to leverage distinct skills without degrading firm profits. “For example, one could create a team structure where performance is measured at the team level, but team members have specialized tasks,” write the researchers. Hunters would focus on their specialty, farmers on theirs, but they would be compensated based on joint performance.
- Hunters should be transferred more frequently than farmers. Transfers between bank branches are a common practice given that employees accrue private information on customers over time – information that is unobservable to the firm and that employees can exploit to their personal benefit. This includes information like how well a customer is running her business or whether she is experiencing unexpected financial hardship.
In the case of the microfinance bank, the researchers find that salespeople use private information in two conflicting ways. On one hand, they use it to bring in more loans of lower quality given the short-term personal gains; on the other hand, they use it to reduce delinquency of loans being collected. “This implies that private information can either benefit or hurt the firm’s profit,” the researchers write. “It can help increase efficiency by allowing salespeople to target the right customers for maintenance, but enhance the incentive misalignment between salespeople and the firm by encouraging salespeople to selectively acquire the easier-to-acquire, less profitable customers.”
What to do? The researchers suggest transferring hunters more frequently than farmers, as hunters are more likely to abuse private information to the detriment of the firm.
In the end, the researchers demonstrate that, outside the most basic sales conditions, incentives must be designed with a careful eye to the specific responsibilities and interests of a salesforce. To do otherwise risks significant harm to the firm.