From products to solutions – mastering sales force incentives
In 2016, the world’s second largest forklift producer KION Group acquired Dematic, a leading provider of supply chain automation technology, software, and services. KION’s rationale according to CEO Gordon Riske: “We are becoming a unique provider of products, solutions, and services. Like no one else in our industry we are now able to accompany every customer seamlessly on their journey towards industry 4.0 and intralogistics 4.0, and on a global scale.”1
KION follows in the footsteps of General Electric, IBM, and Siemens. All of these companies have substantially invested in their transition from being providers of products to being providers of solutions. In other words, instead of merely selling goods that customers use to solve their problems, companies aim to solve customers’ problems themselves. They hereby hope to tap into new potentials for growth and customer retention.2
All of these companies have substantially invested in their transition from being providers of products to being providers of solutions. In other words, instead of merely selling goods that customers use to solve their problems, companies aim to solve customers’ problems themselves.
The introduction of increasingly complex and individualised services – we speak of complex service solutions in this respect – puts high and novel requirements on the sales function. Employees must move from being salespersons to being sales consultants. To manage this drastic role shift, they need to (a) understand customers’ business models and needs in unprecedented depth, (b) customise solutions to these needs with acumen and creativity, and (c) coordinate many internal and external stakeholders.3
Accordingly, employers must rethink their established sales management practices. Regarding compensation, specifically, we are often asked by top and senior managers how to best incentivise employees who sell solutions. Many seem to be concerned that traditional incentive schemes are now inapt – and rightly so. Incentive systems must change to support the shift from product selling to solution selling.
Reduced Variable Compensation
The logic of why we incentivise sales representatives is intuitive: We motivate them to give us what we desire – e.g. revenue – by linking their performance to something they desire – e.g. compensation. This is often successful: Many studies show that once a company introduced sales force incentives, sales performance increased.
High incentives can make employees over-focus on the money at stake, which counters exactly the key skill that is required for selling solutions: the ability to solve problems.
However, we also know that incentives possess a dark side. High incentives can make employees over-focus on the money at stake, which counters exactly the key skill that is required for selling solutions: the ability to solve problems. In a famous series of studies led by Dan Ariely of Duke University, participants were asked to carry out either very simple problems or problems that required cognitive skills, such as creativity. Additionally, participants were promised different rewards for successfully solving these problems. Ariely and his colleagues found that as soon as a problem required cognitive skills, high incentives were counter-productive and made participants perform worse than participants who were not incentivised at all.4
Our own field research supported these findings. Together with colleagues from the University of Bochum, we examined data from an international provider of technological solutions that compensated its sales force using a variety of schemes. Company records and survey data from several hundred sales consultants revealed that high incentives to sell solutions were counterproductive. They actually deteriorated sales consultants’ ability to solve problems as well as the revenue they generated with solutions.5
Many companies are already aware of this issue and adapting their incentive systems to improve sales representatives’ focus on customers’ needs and their ability to sell services. Berner Deutschland, for example, one of Germany’s largest wholesalers of fastening materials, used to compensate its sales representatives with a fixed salary of 20% and variable compensation of 80% (assuming quota was achieved). Some time ago, Berner reversed this ratio to a fixed salary of 80% and variable compensation of 20%.6
With 20%, Berner chose a share of variable compensation that we frequently hear from solution providers. However, the “right” share of variable compensation depends on many factors – such as sales representatives’ specific role as well as characteristics of the sales cycle – and requires careful analysis.7 The generalisable insight is, though, that this share will typically be lower than in traditional product sales.
Bonuses Rather Than Commissions
While commissions reward sales representatives on every euro they generate in revenue, a bonus is based on the degree of target achievement. Much has been written about the manifold advantages and disadvantages of the two systems and when talking to managers, we often hear strong beliefs that favour one over the other. For complex service solutions, however, two reasons suggest that bonuses are the better choice.
The first reason is – again – the danger of overly focussing on compensation. When every single deal increases sales representatives’ paychecks, they tend to think and act with a short-term mindset. However, making a solution sale is often a long-term investment in building and maintaining relationships with customers, developing deep customer insight, and orchestrating internal stakeholders. Studies show that bonuses are therefore better suited than commissions to ensure that sales representatives do not compromise on these tasks.8
Second, while commissions typically reward revenue only, bonuses allow incentivising sales consultants on multiple metrics. This makes sense given the complex factors that determine whether pitching a solution to a prospect is successful. One solution provider that we work with, for example, grants sales representatives a bonus based on their target achievement in terms of revenue, contribution margin, customer satisfaction and retention, as well as the quality of internal collaboration. Managers need to keep in mind, though, that simplicity is a major success factor of sales force incentives.
Team Rather Than Individual Incentives
Selling solutions is a complex endeavor usually involving several people on both the supplier and the customer side. For example, PERI, a leading provider of formwork and scaffolding solutions for the construction industry, teams up sales engineers, who are responsible for commercial aspects of the deal, with design engineers, who are responsible for technical aspects. In settings like these, making a deal rests on the collaborative effort of all team members such that quantifying the contribution of an individual may be difficult.
While these factors may recommend basing incentives on team performance rather than an individual, managers need to be aware of the trade-offs involved. Team incentives foster cooperation between team members but may also lead to “free riding.” This means that team members tend to reduce their effort and rely on their colleagues to sort things out. In contrast, incentivising on individual performance motivates sales representatives to put in the high effort but may impair their willingness to collaborate.
Deciding between individual and team-based incentives requires a careful analysis of the behaviours required to sell each solution successfully.
We sometimes hear managers advocate team-based incentives in general, because they regard teamwork to be superior to fighting alone. However, such dogmas do not endure scientific scrutiny. For example, together with colleagues from the Frankfurt School of Finance and the University of Bochum we recently analysed big data from a fashion retailer that had abandoned team-based incentives to instead reward salespeople on individual performance. First results show that this decision immediately paid off financially. On average, salespeople in the retailer’s several dozen stores today generates significantly higher revenue.9 In this rather simple context, individual effort seems to play a more important role for financial performance than collaboration. The lesson is that deciding between individual and team-based incentives requires a careful analysis of the behaviours required to sell each solution successfully.
With reduced variable compensation that is paid as a multi-metric bonus and based on team performance, compensation managers set sail for the move toward solution selling. However, it is important to note that adjusting the compensation scheme will not suffice. Beyond setting the right incentives, sales management comprises, among others, hiring, training, goal setting and performance management, leadership and coaching, as well as deciding about sales processes, sales force sizes, and sales force structure.10 Given the fundamental role shift required to successfully sell solutions, establishing oneself as a solution provider requires significant changes in all of these areas.
This article was originally published by The European Business Review.
1. Handelsblatt (2016): “ Kion kauft Dematic,” June 21, available at www.handelsblatt.com/unternehmen/industrie/automatisierung-kion-kauft-de...
2. Ploetner, Olaf (2012): Counter Strategies in Global Markets, Palgrave Macmillan.
3. Ploetner, Olaf (2016): “Cost traps in business models 4.0,” ESMT working paper, available at https://www.esmt.org/cost-traps-business-models-40.
4. Ariely, Dan, Uri Gneezy, George Loewenstein, and Nina Mazar (2009): “Large stakes and big mistakes,” Review of Economic Studies, 76 (2), 451-469.
5. Wieseke, Jan, Sascha Alavi, Johannes Habel, Christian Schmitz, and Felix Brüggemann (2016): “The ambivalent role of variable compensation in industrial servitization,” EMAC 2016, Oslo.
6. Hanser, Peter (2014): “Revolution im Direktvertrieb,” absatzwirtschaft, 6, 42-45.
7. Zoltners, Andris A., Prabhakant Sinha, and Sally E. Lorimer (2006): The Complete Guide to Sales Force Incentive Compensation: How to Design and Implement Plans that Work, AMACOM.
8. Kishore, Sunil, Raghunath Singh Rao, Om Narasimhan, and George John (2013): “Bonuses versus commissions: A field study,” Journal of Marketing Research, 50 (3), 317-333.
9. Artz, Martin, Johannes Habel, Sascha Alavi, and Jan Wieseke (2015): “Strategy Implementation by Performance Measure Disaggregation: Evidence from a Quasi-field Experiment in Sales Retailing,” Annual Congress of the European Accounting Association, Glasgow.
10. Zoltners, Andris A., Prabhakant Sinha, and Sally E. Lorimer (2012): “Breaking the sales force incentive addiction: A balanced approach to sales force effectiveness,” Journal of Personal Selling & Sales Management, 32 (2), 171-186.