May 1988 .

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Selling & Sales Management in Action:

A COMPARATIVE STUDY OF INCENTIVES IN A SALES FORCE CONTEST

by Marjorie J. Caballero Baylor University Questions pertaining to the issue of various incentives as motivators for the sales force have been raised periodically for many years. For example, an early study by Haring and Myers (1953) concluded that "basic compensation is the primary motivator of salesmen" [sic], although the findings from this study have subsequently been questioned on a methodological basis (Oliver 1974). Nevertheless, Farley's (1964) model for setting commission rates is based on the assumption that "salesmen strive to maximize their financial gains," and many incentive and commission plans used by managers for compensating the sales force rely on similar assumptions (Smyth 1968; Marks 1985; Johnson, Kurtz, Sheuing 1986). However, these assumptions are being called into question more and more. A recent study conducted jointly by the American Productivity Center and the American Compensation Association found that there is a revolution going on in almost every industry (O'Dell 1987). Organizations are implementing various incentive plansmore particularly, pay-forperformance systemsin addition to their existing compensation plans. In fact, 67 percent of the 1,600 organizations that responded to the APC study have some form of reward system in addition to their compensation plans. Further, there is evidence that the use of incentives is steadily increasing. Even during the last recession, a survey taken by Sales SMarketing Management (Urbanski 1982) showed that 54 percent of respondents planned to lavish even bigger budgets on their incentive programs during the coming year. And by 1985, a Business Marketing survey was able to report that an 83 percent premium/incentive usage rate existed among respondents (Couretas 1985). Why Use Incentive Programs? 1. To keep morale up. Sales managers found that even during the recession contests could be cost-effective and keep up the sales force's morale regardless of the current state of the economy. As one manager put it, "Even in these bad times, you have to take care of your people. You can't be all bottom line" (Urbanski 1982). 2. To boost dollar sales per salesperson or to increase units sold per salesperson. Cost effectiveness is an important tie-in; the increased level of sales generated by an incentive plan should make the plan, at a minimum, selfliquidating. 3. To increase the number of new accounts. As one account manager said of finding new accounts. "It's very important. That's the only way we're going to grow" (Couretas 1985). 4. To launch new products. Frequently salespeople are reluctant to spend time on a product that has not yet been proven in the marketplace. The risk of customer disappointment is high, and the time required to stimulate interest may be considerably more than would be required for selling proven products. The incentive plans provide a reason to spend extra time and take extra risk. Types of Incentives Salary and a commission based on some performance measurement are the usual forms of compensation. However, the purpose of this article is to address rewards that are not part of the usual compensation plan. These may be defined as follows (McAdams 1987): 1. Special Casb Incentives. These are cash awards that are not part of the usual compensation plan.
Journal of Personal Selling & Sales Management, Vol. Vm {May 1988), pp. 55-58.

Editor: David L. Kurtz Seattle University

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2. Non-Cash Incentives. This category may include an almost endless variety of products that can be subdivided as follows: a. Merchandise Awards. Pre-selected or earned through some system of point accumulation. b. Travel/Entertainment Awards. Trips, tickets to events, or complimentary meals awarded to an individual/family within the organization. These may be associated with business seminars. c. Status Awards. Club memberships, upgrades on business cards, or automobiles, etc. d. Recognition Awards. Given more for symbolic rather than intrinsic value. May include such items as trophies, plaques, company rings, desk sets, publicity, etc. Although cash incentives are by far the most popular form, the use of cash is surrounded by controversy. While most people say they prefer money to other types of rewards, many organizations feel they get more for their money through non-cash awards. Non-cash awards are chosen over cash primarily for two reasons: (1) The perceived value may be higher than the actual cost to the organization and (2) trophy-value. "Trophy value" means that the award provides a long-lasting, positive reinforcement to the recipient. Unlike cash which may be spent on groceries or paying the bills, non-cash awards continue to provide tangible reminders of the work and actions that earned the award. Thus the energy and thought processes that helped the individual improve performance are reinforced over time. Negative Side Effects Although much can be said in favor of sales force contests, these contests can have negative side effects. In some cases the negatives may outweigh the positives. Wildt, Parker, and Harris (1980-81) cite four broad areas from which adverse effects generally arise: 1. Sales Volume Levels. Boosts in sales volume may not only be temporary but may actually be a result of "borrowing" sales from periods preceding and/or following the sales contest period. 2. Sales Personnel Motivation. Disappointment over losing or over perceived inequities in contest criteria can lead to a decline in sales force morale. Professional salespeople also object to approaches that appear to demean the intelligence and, in some cases, create intracompany

rivalry that jeopardizes the harmonious atmosphere of the organization. 3. Corporate Side Effects. These side effects have broader company impact including such behaviors as neglecting to sell other products and services, misrepresenting the product and/or company, and accepting poor credit risks. 4. Customer Relations. Salespeople may be tempted to sacrifice good long-time relationships in favor of short-term productivity, thus endangering the on-going customer base. While it is unlikely that all of these negative side effects would occur stimultaneously, evidence exists that certain kinds of negative effects tend to be associated with specific contest and company environment characteristics (Wotruba and Schoel 1983) Because of the high interest in incentive programs and in the merits of various incentive plans, the following experimental study was undertaken. The Study The purpose of this study was to determine the relative effectiveness of merchandise incentives versus travel/entertainment and cash awards for motivating sales force performance. A sales contest was set up to provide a vehicle for testing the three types of incentives in a realistic field setting. The results indicate that the group with the travel/entertainment incentives performed best followed by the group with the cash incentive and, lastly, the merchandise incentives. However, all treatments produced an increase over the previous year's production, and the sales contest proved to be highly costeffective for the subject company. Methodology The company selected for the project was an independent agent for Northwestern Mutual Life Insurance. The agent provided a 45-member sales force that was subsequently divided into three different teams. Each team was composed of 15 salespersons, and care was taken to match the teams in terms of selling experience and past performance. A sales contest was developed around the theme "The Quiet Run," a play on Northwestern's slogan "The Quiet Company." Each team was depicted on a display board that was designed to represent a cross-country run. The three teams were named the Red Racers, the Yellow Lightning, and the Blue Thunder. The incentive program was set up so that the top salesperson for each team would win the prize designated for his team's experimental treatment. That

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is, the top salesperson for the Red Racers won the trip to Ixtapa, Mexico, the top salesperson for the Yellow Lightning won $500.00 cash, and the top salesperson for the Blue Thunder won his choice of $500.00 worth of merchandise. Additionally, each member of the winning team was given dinner for two at one of Dallas' finest restaurantsapproximately a $50.00 value. (Fifty dollars in cash or in merchandise would have been awarded to each team member of either the Yellow Lightning or Blue Thunder, respectively, had either of these been the winning team.) The test period ran for seven weeks, from May 26, 1987 through July 13, 1987, a period that was deemed to be of sufficient duration as to adequately test the experimental treatments. During this period both individual and team progress was recorded on the display board wbich was located in the company break room. The dependent variable being tested was the number of new-business clients recruited by members of tbe sales force. This measure of productivity is extremely important in the life insurance business in order to ensure against an erosion over time of the client base through lapsed policies and client mortality. Acquiring new accounts is also one of the most frequently cited objectives for which sales contests are used. As shown in Table 1, the Red Racers, whose incentive package consisted of the trip for the top performer and dinners for two for the other members of the team, significantly outperformed the other two teams. While the Yellow Lightning also outperformed the Blue Thunder, the margin of difference was smaller. It is important to note that, as a result of the contest, new-client sales showed a 39 percent improvement over last year's performance when tabulated on an annualized basis. Even tbe worst performing team. Blue Thunder, with the merchandise incentives, when reckoned on an annualized equivalent, showed a 22 percent increase over the previous year's new client figure. Few negative side effects were observed as a result of this contest. The contest objective was new-client

sales. Since new client sales are critical to maintaining the pool of policy holders which would otherwise be reducing due to natural attrition, the contest objective and profit contribution objectives are compatible. Further, this contest was directed toward an objective to which the home office was also committed. These features tended to minimize negative corporate side effects as well as nullify negative sales volume effects. Finally, standardized criteria imposed by the home office for client acceptance tends to discourage salespeople from approaching unqualified prospects. The only observed conflict was in the area of sales personnel motivation. Some agents wished that they had not been assigned to a particular team for personality reasons or because they preferred to be working toward a different prize. Nevertheless, most salespeople seemed to readily understand the need for keeping the teams relatively equal in terms of experience. Certain characteristics have been found to minimize negative side effects (Wotruba and Scboel 1983) were also present in tbis contest; 1. Sales force has higher average income. 2. Major customer types are not middlemen. 3. Regular compensation plan is above average in effectiveness. 4. Major contest objective was not emphasizing higher margin products or increasing market share. 5. Only one contest objective. 6. Salespeople were competing against each other. 7. Honor and recognition are not the major prizes. 8. Only a single factor was used to calculate rewards. 9. Salespeople were informed only a short time in advance of the contest's start. 10. Contest was budgeted with a fixed sum. Conclusions Although the merchandise incentive did not produce as large an increase in new clients as the trip/

Table 1 Results of the "Quiet Run" Contest Teams Red Racers Incentive Plan Number of New Clients Trip/Entertainment
74.42*

Yellow Lightning Cash

62.45

Blue Thunder Merchandise

56.83

* Fractions of new clients result from new clients being developed jointly witb otber agencies.

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entertainment and cash incentives, it is clear that any incentives are better than nothing at all. Sales contests do produce extraordinary results, but they should be used judiciously so as to retain their impact on sales force motivation. Sales contests should also be, at a minimum, selfliquidating. Since sales-related objectives are usually the goals in a contest, managers can determine their approximate break-even point. In the case of the Quiet Run, break-even was estimated to fall at slightly less than one new client per salesperson, a figure that was far exceeded by actual new business. The widespread use of sales contests indicates that industry believes in incentive programs and uses them. Further, findings such as those reported in this study point up the potential for using incentive plans. The real questions should now focus on program design, scheduling, and implementation. While many programs work extremely well, others produce disappointing results. How often should a contest be run? Should it be targeted toward the sales force? toward dealerships and distributorships? Which incentive plans work best? under what conditions? for what objectives? Are there norms that can be established to ensure success for varying conditions? What are some of the possible side effects (positive or negative) that occur in conjunction with sales contests? Do contests produce any long-term residual effects? These are only a few of the research questions that need to be answered to effectively manage sales force contests. To establish identifiable patterns it will be necessary to accrue a pool of studies that reflect both attitudinal and behavioral responses from participants and observers. The potential advantage from using sales contests appears to be substantial, but, in the long run, effectiveness will be

contingent upon careful planning and implementation.

References
Couretas, John (1985), "Most Plan to Boost Spending; Cash Tops the List," Business Marketing (April), 40-48. Farley, John U. (1964), "Optimal Plan for Salesmen's Compensation," Journal of Marketing Research (May), 39-43. Haring, Alhert and Rohert H. Myers (1953), "Special Incentives for Salesmen," Journal of Marketing (Octoher), 155159. Johnson, Eugene M., David L. Kurtz, and Eberhard Scheuing (1986), Sales Management, New York: McGraw-Hill Book Company, 394-415. Marks, Ronald B. (1985), Personal Selling, 2nd ed., Newton, Massachusetts: AUyn and Bacon, Inc., 511-517. McAdams, Jerry (1987), "Rewarding Sales and Marketing Performance," Management Review (April), 33-38. O'Dell, Carla (1987), People, Performance and Pay, Houston, Texas: American Productivity Center. Oliver, Richard L. (1974), "Expectancy Theory Predictions of Salesmen's Performance," Journal of Marketing Research (August), 243-253. Smyth, Richard O. (1968), "Financial Incentives for Salesmen," Harvard Business Review (January-February), 109-117. Urbanski, Al (1982), "Something for Everyoneand More of It," Sales 6- Marketing Management (April 5), 72-82. Wildt, Albert R., James D. Parker, and Clyde E. Harris, Jr. (1980-81), Journal of Personal Selling and Sales Management (Fall/Winter), 57-64. Wotruba, Thomas R. and Donald J. Schoel (1983), Journal of Personal Selling S- Sales Management (May), 1-10. The author wishes to thank Al Angell, Ceneral Agent, Northwestern Mutual Life Insurance, Inc. and the Specialty Advertising Association International for their support of this project.