Why CEOs Shouldn’t Discard Their Sales Incentives

GettyImages-463833801-compressorIn 2009, business author Daniel Pink shook the world of motivation by suggesting that financial sales incentives should be eliminated for all roles requiring cognitive thinking, including sales roles, which, in aggregate, average 40% of their pay in financial incentives. The basic premise was that extrinsic incentives don’t help with the completion of complicated, cognitive tasks. In fact, they hurt performance. Pink advocated for intrinsic incentives only, such as autonomy, mastery and purpose.

This idea caused sales compensation plans to come under fire and sparked a conversation within companies about disbanding their sales incentive programs. As a CEO, you may have been part of these conversations. But before you consider moving to a comp plan devoid of sales incentives, consider the following research that shows why that might not be a wise decision.

Both sides of the “intrinsic vs. extrinsic” incentive debate can find individual studies that support their argument. Also, there are literally hundreds of studies available about motivation. A more productive literature review looks at meta-studies—essentially ‘studies of studies’—to show what all of the research says in aggregate.

One meta-analysis done by Uco Wiersma compared the impact on motivation when there were intrinsic incentives, extrinsic incentives, or both. The analysis showed that intrinsic and extrinsic incentives were actually additive. In other words, the value of the extrinsic motivation combined with intrinsic motivation was higher than the value of either motivator separately.

“What can we take from all of the academic literature? That financial incentives improve effort and results. They don’t hinder the quality of the work being done.”

Another meta-analysis done by Nina Jenkins and Douglas Gupta from the University of Arkansas showed that while financial incentives clearly had a positive impact on the quantity of the work being done, they did not negatively impact the quality of the work. This is counter to Pink’s argument that adding financial incentives for cognitive tasks will actually reduce the quality of the outcome.

Finally, a meta-analysis done by Steve J. Condly, Richard E. Clark and Harold D. Stolovitch confirmed that the existence of financial incentives had a positive effect on the ultimate outcome for cognitive tasks. Across all studies, the existence of financial incentives showed a 22% gain in the end result for cognitive work tasks.

In addition, short-term (less than one month) incentives only had a 20% impact across all studies, whereas long-term incentives (more than six months) impacted performance by more than twice as much (44%). The studies in Pink’s book (and elsewhere) are very short-term, measured mostly in minutes or hours. Sales incentives, however, are almost universally long-term (mostly a full year) and, at a minimum, are classified as medium-term (one to six months).

What can we take from all of the academic literature? That financial incentives improve effort and results. They don’t hinder the quality of the work being done. The future of sales motivation is an optimal combination of intrinsic and extrinsic incentives. It isn’t an “either-or” proposition, but a “both-and.” Being excellent in both is the only way to maximize the motivation of the sales force and the results they produce. Focusing solely on intrinsic incentives at the expense of extrinsic incentives could result in an unwanted “pendulum swing” in compensation that will cause you to lose top performers who can make more money elsewhere.

Chad Albrecht is a principal at ZS in Chicago and is a leader in the firm’s sales compensation practice area. He and ZS principal Steve Marley are the authors of The Future of Sales Compensation (ZS; 2016).