To test this concept, we employed it across different in- dustries and different geographies, with more than 10,000 salespeople, and found that self-selected incentives in- deed outperform assigned incentives by up to 25 percent.


HOW IT WORKS


Our self-selected incentive scheme has three key features that leverage each of the three core mechanisms propound- ed by the goal setting theory. The first feature – the choice feature – addresses the primary concern: involving the sales force in goal setting. The choice feature allows management to propose a menu of goal/reward level combinations to the sales force. Each salesperson actively participates and selects a goal/reward level combination that best matches his or her preferences. The second feature – the individualized goals feature – computes individualized goals for each salesperson based on his or her past performance record. Therefore, the goals offered are challenging but achievable and realistic. The third feature – all or nothing – strictly adheres to one principle: the salespeople receive their rewards only when they fully achieve the selected goal.


AN EXAMPLE


Collaborating with an American automotive company, we presented their sales managers with three individualized goal/reward combinations based on their past perfor- mance. The employees were given the option to choose any one of the three combinations. They were strictly informed about adhering to three ground rules: 1. They receive rewards only when they achieve the preselected goal


2. If they fail to achieve the selected target, they do not receive any reward at all


3. There is no additional reward for extra achievement


Table 1: Simple Illustration of the Self-Selected Incentive Scheme


Goal and


Reward 1 2 3


Goal


Baseline+1 percent Baseline+3 percent Baseline+5 percent


Reward


$1,000 $2,000 $5,000


Note: baseline = the average of the individual salesperson’s sales over the past three months


Let us consider a scenario where Julie, Jose, and Claire all select Goal 2. Julie attains her target of 3 percent im- provement over her baseline. As promised, she receives an


incentive of $2,000. However, Jose achieves only 2 percent improvement; owing to the all-or-nothing feature of the scheme, he does not receive any reward at all. Claire, on the other hand, achieves 5 percent improvement, but her incentive is still $2,000; she does not receive any extra reward, although she could have received $5,000 had she selected Goal 3 in the beginning. Hopefully, you have already noticed that the reward


increases rapidly as the goal difficulty increases. If the easiest target awards the achievers with $1,000, the medium goal awards double. Subsequently, the toughest goal rewards $5,000, which is more than double the previous goal level. This accelerated relationship of goals and rewards makes the higher goal levels more lucrative – discouraging salespeople from selecting a target that is lower than they are capable of achieving, thus motivating them to select a higher and riskier goal. Since the all-or-nothing factor is at play, the salespeople optimize their performance so they do not end up empty-handed.


SUMMING UP We worked with numerous firms to implement our self-selected incentive scheme and received promising results. For instance, a telecommunications firm, which shifted to a self-selected incentive scheme, observed a 25 percent increase in performance. In a completely different sales context, an automobile manufacturer observed a 10 percent increase in performance. The self- selected scheme has been tried and tested across mul- tiple firms with employees of different hierarchical levels. Overall, more than 10,000 salespeople participated in our projects, and the performance improvement has been in the range of 10-25 percent. Our research ascertains that salespeople respond well to self-selected incentive schemes; and, in doing so, it paves the path for companies to develop their own incentive structures in a similar direction. We recommend com- panies keenly observe and understand their sales force, design the goal/reward combinations accordingly, and let their salespeople self-select a combination that matches individual preferences. However, one medicine cannot cure all diseases; like- wise, one plan may not fit all situations and solve all prob- lems. Nevertheless, our self-selected incentive scheme can be the basis to the genesis of more customized incentive schemes for many organizations.


For more information, contact Raghuram_Bommaraju@isb.edu or Sebastian.Hohenberg@mccombs.utexas.edu.


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The mind that is anxious about future events is miserable. SENECA


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