Teaching Your Sales Force Through Pay for Performance
As Americans breathlessly awaited release of the Wells Report concerning the New England Patriots football deflation scandal, another one was unfolding. A scandal that didn't feature star athletes and lascivious double entendres, but one that was more heinous. USA Today reported that "the city of Los Angeles filed a civil lawsuit [May 5th, 2015] against Wells Fargo, alleging that the bank has been looking the other way as its sales people take advantage of customers, including Mexican immigrants, by opening accounts and issuing credit cards without their permission."
Those aggressive, money-hungry salespeople! They have no scruples!
So easy to point fingers. But if you're looking for a root cause, search upstream. In the direction of power breakfasts, bespoke suits, and C-Suite MBA's. There, on the shiny boardroom table, you will find the smoking gun. The alleged chicanery originates from the Wells Fargo business model, aided and abetted by the sales culture and the sales rep pay plan.
According to a press release from LA City Attorney, Mike Feuer, ". . . Wells Fargo's business model imposed unrealistic sales quotas that, among other things, have driven employees to engage in unlawful activity including opening fee-generating customer accounts and adding unwanted secondary accounts to primary accounts without permission. These practices allegedly have led to significant hardship and financial loss to consumers, including having money withdrawn from customer's authorized accounts to pay for fees assessed by Wells Fargo on unauthorized accounts and derogatory notes on credit reports when unauthorized fees went unpaid, causing some customers to purchase identity theft protection. Furthermore, the complaint alleges that Wells Fargo failed to properly inform customers of misuse of their personal information and failed to refund unauthorized fees."
The inspirational chant, sell, sell, sell! just took on an appallingly noxious odor. "The result is that Wells Fargo has generated a virtual fee-generating machine, through which its customers are harmed, its employees take the blame, and Wells Fargo reaps the profit," according to the lawsuit. A wearily-familiar story line: executives at a monolithic corporation become enriched at the expense of customers and employees. Theft, on an efficient assembly line where the workers have white collars. Rube Goldberg, if he were alive today, would have struggled to draw an amusing caricature.
Wells Fargo blamed the bad tactics on a few rogue employees, and claimed the offenders were fired or disciplined. But a former Wells Fargo rep, Rita Murillo, tells a different story: "We were constantly told we would end up working for McDonald's . . . If we did not make the sales quotas, we had to stay for what felt like after-school detention, or report to a call session on Saturdays." Ms. Murillo, a Florida branch manager, resigned from the company.
For just a moment, set aside hype from companies espousing their keen commitment to doing the right things for their customers. Ms. Murillo's comments paint a seamier, often unnoticed picture. We're reminded that employers can use performance pay plans to enforce practices that are anything but customer-centric. Arm wrenching communication, delivered via the paycheck. For example, "Above all, we expect you to make your number!" Go ahead - try to find nine words that inject more risk into the customer experience, with the possible exception of please hold, your call is very important to us.
Take a manic focus on revenue or market-share growth, add a hefty portion of variable comp into the sales pay-package, and the result compares to tossing battery acid on customer relationships. Back in 2013, Scott Reckard, reporter for the Los Angeles Times, wrote a prescient article, Wells Fargo's Pressure Cooker Sales Culture Comes at a Cost. "To meet quotas, [Wells Fargo] employees have opened unneeded accounts for customers, ordered credit cards without customers' permission and forged client signatures on paperwork. Some employees begged family members to open ghost accounts." Show me repeated sales misbehavior, and I'll show you a pay plan that influenced and rewarded it.
On the flip side of the Wells Fargo case is Best Buy, which in 1989, famously unleashed a novel pay plan for its sales staff that helped crush archrival Circuit City. Acting on research that revealed consumer distaste for high pressure sales techniques, Best Buy eliminated revenue-based commissions. The Wall Street Journal reported in 2009 (Best Buy Confronts Newer Nemesis) that Best Buy CEO-designate Brian Dunn "opposed [Best Buy's] 1989 decision to do away with commissioned sales in favor of salaried staff, which was widely opposed by sales workers who feared losing income. He now concedes it was the most important shift in company history, lowering worker costs, and changing the core model of electronics retailing. Best Buy expanded across the US, and Circuit City eventually followed by eliminating sales commissions."
Two retail companies with two points of view for motivating, managing, and paying the sales force. And the disparity in outcomes could not be any starker: one company suffering an indelible stain on its reputation and brand, the other vanquishing a formidable competitor and achieving strategic success.
Sales compensation rarely makes it to annals of business history, but it has provided powerful muscle for executing strategy. One reason that many companies routinely tinker with sales rep pay plans. "85% of companies will change their sales compensation plan this year," wrote Andris Zoltners, a pioneer in sales force analytics, in a Harvard Business Review article, Getting Beyond Show Me the Money (April, 2015). "Though it's only one driver, changing a compensation plan is relatively easy, and it can get quick results. It's also an area where there's always room for improvement - it's hard to get right. When you create a plan, it's almost impossible not to overpay some people and underpay others." The rep at your former company who never worked very hard, but was consistently crowned "top producer?" Overpaid. You don't need to mention any names.
Most sales workers today are paid for performance, with revenue attainment nearly ubiquitous in calculating compensation. Some reps receive full commission, others receive a blend of salary plus commission. Put another way, for the majority of salespeople, a component of income is at risk. In sales organizations, the practice has endured for three reasons: 1) output from salespeople is easy to tally, 2) many sales reps work with scant supervision, and variable pay gives managers control over results, and 3) the sales profession attracts people who have a greater tolerance for risk compared to other fields. So, despite Best Buy's successful groundbreaking pay strategy, pay-for-performance remains solidly anchored in selling.
As Cornell Professor Rob Bloomfield explains in an eBook, What Counts and What Gets Counted - Seeing Organizations through an Accountant's Eyes, there are four purposes for providing performance-based pay to salespeople and other workers:
1) Motivation. Effective pay-for-performance programs are designed to provide incentives for working harder and working smarter.
2) Communication. The activities and outcomes that are paid for determine where the employee's effort goes.
3) Risk sharing. When outcomes are not guaranteed, companies can afford to pay when the desired result has been achieved.
4) Screening. Pay structures determine who will apply for a position. A risk-averse individual would not likely consider a position with a high proportion of variable pay.
Done right, pay-for-performance aligns the interests of the employer and employee. But Professor Bloomfield describes the limitations and pitfalls. Performance pay is a simplification of reality, and employers must "decide how much distortion is allowable," he says. Achieving a revenue goal doesn't necessarily comport with working harder, working smarter, or even being honest, and ethical. And it doesn't dependably translate to high customer satisfaction or customer loyalty. Bloomfield cautions that no pay-for-performance system is perfect, and that employers must "choose their poison:" low motivation, high pay, or costly reporting. Improving or optimizing one element sacrifices the others.
Risks lurking in pay-for-performance
1. Misunderstanding the controllability principal. Many of the problems associated with pay-for-performance result from tying employee pay to risks they cannot control. This problem is particularly acute in business development. Salespeople do not influence many significant conditions for quota attainment: product quality, pricing, delivery schedules, economic conditions, information quality, hiring practices. There's a long, long list. Yet, year after year, millions of reps are asked to "commit to a number." In 2013, 58% of sales reps achieved quota, according to CSO Insights.
2. Misalignment of incentive intensity. Incentive pay should be proportionate to the control that salespeople have over outcomes. In other words, the greater the risks salespeople assume, the greater the pay reward for achieving desired results. The converse is also true, as Andris Zoltners describes: "In many product categories, if you sell something one year, there's a high probability you'll make residual sales the next year without any effort. If a salesperson is paid a commission or bonus for free sales, we call that a 'hidden salary',' since it's an incentive paid for something that's nearly automatic."
3. Unintended consequences. Also known as The Cobra Effect. Companies want to establish and maintain high-value customer relationships. But very often, they measure and reward other outcomes, particularly those that improve short-term results. Presumably, Wells Fargo did not originally intend to exploit and deceive its customers, but their pay system created those results. Ideally, companies should strive for harmony between wanted results, and what employees are paid to achieve.
4. Moral hazard. Imperfect measurements create opacity where the employer cannot distinguish whether a positive outcome results from hard work, skill, luck, or fraud. Whether it's Wells Fargo, the Atlanta Public Schools, or other organizations, incentive pay also motivates employees to distort measurements - especially when incentive intensity is high (see #2 above).
5. Bad assumptions, including:
• Paying an employee motivates him or her to care about an outcome. In fact, extrinsic rewards such as pay-for-performance can be demotivating. One example comes from an effort to improve reading skills in which school children were offered a Pizza Hut voucher for every book read. The incentive backfired, creating "fat kids who hate to read."
• Measuring effort improves performance. The person who works 80 hours a week might not serve her clients any better than one works 50 hours a week. An apropos example comes from a Seinfeld episode, in which George Costanza devises a scheme to get a promotion by leaving his car in the parking lot at Yankee Stadium, where he works. He receives the promotion because his boss thinks he is getting to work earlier and staying later than his co-workers, but his plan fails when his incompetency is exposed.
6. Flawed proxies. "Does what gets counted count?" asks Professor Bloomfield. For example, in education, grade point average (GPA) serves as a proxy for subject mastery and knowledge retention. There are gobs of examples in customer service and business development. Those mistaken causal links between output (e.g. number of service calls handled) and outcome (e.g. customer satisfaction scores). Or in sales, prospecting calls made (output), and quota attainment (outcome). "If you're not measuring it, you're not managing it!" So, companies start measuring away, forgetting that, in many instances, the data they collect has weak, or non-existent, connection to what matters.
"I don't care how you make your number, as long as you make it." Verbatim, from my District Sales Manager in the mid-'90's. His straightforward statement belies the difficult conundrum many companies face when paying salespeople on performance. When you can't easily measure how hard or smart people are working, you must calculate pay on outcomes such as revenue achievement. That confusion costs companies through higher commission payouts, and in sales force churn when income doesn't pan out as expected.
Pay-for-performance provides a carrot and a stick. The Wells Fargo lawsuit illustrates just how dysfunctional sales behavior becomes when executives are misinformed or misguided on how to use the tools, and when corporate governance has fallen asleep at the controls, or chooses to look the other way. Two questions must continually be asked and answered: how will pay-for-performance programs work for achieving strategy, and how will employees and customers respond?
This article is part of my monthly column, Navigating Revenue Uncertainty, on CustomerThink. To read the original article, please click here.
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