Incentives are at the core of our economic lives. Consider also that modern day humans are increasingly preoccupied with money, work, and the economy—whether it’s the desire to save money here, earn more money there, make the right purchasing choice, choose the right investment, or whatever else. So it’s easy to see just how important incentives are for you and your organization. First, it’s important that we start to think about incentives in a certain way. Ensuring that the incentives you implement have the intended effect ultimately comes down to one thing: Taking the right approach to behavior modification.
Which raises a few key questions. How are incentives a question of behavior modification? How do caps and quotas impact progress? What’s the “right reward” for your employees (the reward that will produce precisely the desired effect)? And, what can we learn from the working habits of New York City’s cab drivers?
Incentives as Behavior Modification
At the end of the day, it’s important to understand what exactly your organization is trying to accomplish with incentives.
It’s easy to think about the end goal as a percentage increase in quarterly revenue, a fixed amount of added customer lifetime value, a higher customer retention rate, or something similar. There’s nothing wrong with framing your goals in this way—so long as it’s not the only way you think about them.
What do we mean? Essentially, you have to remember that, while your or your supervisor’s end goal might be more sales or happier customers, focusing strictly on that goal will take your attention away from the path that gets you there. And that path is behavior modification.
The best way to think about the changes you’re looking to make is to humanize them. Your organization is made up of a workforce, and that workforce is comprised of individual people. Those people exhibit specific behaviors each and every day on the job. Humans are creatures of habit, and you can be sure that the behaviors you see in your workforce are habit- and pattern-based. Your goal with incentives shouldn’t just be to make more money; it also should be to change the behaviors of your team members. It doesn’t matter which department you’re talking about, either. Let’s look at a few examples.
First, think sales. Your initial goal might be a 10% increase in revenue. How do you make that happen? Walking into a meeting with your sales team and telling them to work harder probably isn’t going to get you there. You have to understand what behaviors they’re exhibiting, and how you can go about changing those behaviors. Are they consistently getting off to a slow start each quarter because they’re worn out from pushing so hard at the end of the previous one? Incentivize something right out of the box in month one of Q1, Q2, Q3, and Q4. Are they slowing down towards the end of the quarter because they’ve already “hit their numbers?” (We’ll discuss how to address this challenge of quotas and caps below.) Either way, you’re not just trying to increase sales, your aim is to modify your team’s behavior in a way that should produce that result.
The same thing goes for your human resources or customer service departments. Maybe there’s something HR is doing (or isn’t doing) during the hiring process, and you want to see it change. Or, maybe there are too many returns coming in through customer service that can’t be restocked, and you want to change the way your team evaluates the feasibility of return with each customer. These examples may not be relevant to your business, but that doesn’t matter. The point is that every business faces its own interdepartmental challenges, and the key to addressing them is through implementing incentives as a means of behavior modification.
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Remember, too, that different employees are, well, different. Your sales team isn’t your customer service team. In fact, you’ll often find that certain personalities are drawn to specific roles within your organization. This is true across industries and niches. Salespeople are motivated by particular types of incentives that might be less appealing to someone in customer service, and vice versa. It may be that cash performance bonuses work well with your highly competitive and driven sales team, whereas your customer service department performs better when working together as a group towards a community giving goal. As long as you remember that you’re looking to modify behaviors rather than simply “getting to the end goal” (of more sales, more customers, or whatever it might be), you’ll be well on your way to implementing incentives in the best way possible.
Quotas and Caps: Enemies of Progress
Let’s turn our attention to sales for a moment. More often than not, the clients we’ve worked with are focused on incentivizing their sales force. It’s a common issue that companies run into: Their sales team is doing fine, but they need to take things up a notch. The problem is that they’re not sure how. That’s when they come to us.
Time and time again, we see our clients making the same mistake. It’s understandable too: After all, conventional wisdom would dictate that they’re doing the right thing. Our experience proves otherwise, though. And, as we’ll see below, scholarly research agrees with our assessment, too.
What are we talking about here? It’s simple: caps and quotas.
We call them the enemies of progress.
Why? Because quotas and caps are practically guaranteed to stunt your company’s growth.
We’ve seen it happen so many times with our clients. Their salespeople are on fire, and they’re breaking one record after another. Things are looking up, and this quarter is bound to be the best in living memory. There’s some kind of incentive structure in place—maybe just a simple cash commission—and a few key members of the sales team are raking in massive amounts of financial rewards.
But, there’s a cap on how much they can earn per quarter. The cap is usually there because the company is concerned about paying out too much to any individual member of the sales team. Maybe their rationale is that they want everyone to perform well, rather than having a couple of superstars that get on a streak and rake in too much during a single quarter. Whatever the logic behind putting a cap on your sales team’s rewards might be, we’re here to tell you, the logic is flawed.
As soon as your star salesperson hits that cap, their streak is over. Maybe it’s only a week before the numbers reset for the following quarter, but guess what? They’ve had the experience of hitting the cap. As a result, they now know that their earnings potential is limited. Come next quarter, why should they work their butt off week after week to exceed expectations? It makes more sense for them to lighten their workload a little and spread it out as evenly across the quarter as possible, because there’s no advantage to hitting that cap early. They’ll just be working long hours week after week, and they’ll still have to do their job once the cap has been reached. They may actually put off closings until the next quarter.
The same goes for quotas. When there’s a quota in place, your employees start to see that quota as their target. Their goal isn’t to make as much as they can, or to sell as much as they can, it’s to hit that minimum target. The target itself is arbitrary. You can set the quota high, but that won’t have the effect you probably intend. Different sales people are different, and some of them simply won’t be able to hit that quota. They’ll feel discouraged early on in the quarter once they realize they don’t stand a chance of hitting that goal, and it’ll discourage them. Meanwhile, your superstar salespeople will reach the quota and then slow down. Why? Because they’ve hit their goal. Time to relax, right?
Whether it’s quotas or caps, the issue here is psychological. When a cap or quota is achieved, the incentive dissolves. And if that cap or quota is unreachable, it’s as if it never existed. When you start thinking about how your employees behave rather than simply focusing on the end results that you want, you can begin to see how important it is to shape their behavior. To illustrate this point further, let’s turn to New York City and its fleet of cabs.
The Case of the Cabbies
Have you ever been to New York City on a rainy day? If you ask a New Yorker, they’ll tell you it’s practically written in stone: When you need a cab in the rain, you’ll never find one. It’s an immutable law of New York.
Let’s think about that for a moment. Turning back to traditional, classical economics, this doesn’t make any sense. According to the law of supply and demand, an increase in people looking for cabs (demand) should be met with an increase in the number of cab drivers (supply). Why is it that when there are so many people standing on the corner for a cab, the number of cabs seems to decrease?
A team of economists looked into this back in the late 1990s, and their findings had a big impact on the development of behavioral economics. Richard Camerer, George Loewenstein, Linda Babcock, and Richard H. Thaler found that cab drivers don’t adhere to the logical, rational, unemotional law of supply and demand in the way that classical economics would predict. No surprise there, though. After all: they’re humans, and humans are emotional creatures with incentive-influenced behaviors.
Here’s the thing: Cab drivers are trying to earn a specific amount of money each day. They have a quota in mind, whether that quota is set by the cab owner, or themselves if they’re the owner. They’re not out to earn as much as possible in their cab. Many drivers want to hit their quota and go home. On some days, they can hit their quota in a shorter amount of time. On other days, they’ll work nearly twice as many hours before they reach their goal.
Why? The biggest determining factor is simply the number of people out and about looking for a cab ride. On some days, more people will opt to walk. As a result, there will be fewer people in need of a cab on any given street in New York. Cab drivers will then spend more time driving around, waiting to find their next passenger.
On a rainy day, the opposite happens. Everyone wants a cab, because they don’t want to walk in the rain. As a result, it becomes incredibly easy for cab drivers to pick up one passenger after another, back to back. Camerer et al. found that once they’ve hit their quota early, they knock off for the day.
Why don’t they just continue working? Why not earn more that day while the going is easy? Because they have a quota in mind. If there were no quota, they might keep working.
So-called income targeting can teach us a lot about what we shouldn’t do if we want to incentivize employees properly. Don’t set quotas. Don’t set caps. Just create the right incentives, target them at the proper behaviors, and watch the sales roll in.
What’s the Right Reward?
Assuming you don’t put caps or quotas on your team, you’re on your way to success when it comes to incentives. Before you reach your goals, though, there are other things to take into account.
One of the issues we’ve run into in the past with some of our clients involves the “right reward” for the right situation. Matching an incentive with a particular department, job, or product can seem like common sense. But things can get complicated quickly. If you don’t provide the proper level of reward for a given scenario, you could end up with employees who are either totally unmotivated—or who are receiving a reward that’s incommensurate with their experience and/or existing pay level. We want to avoid both of these outcomes, as neither of them is good for your bottom line in the long run.
Remember, the goal of any incentive is to change an employee’s behavior. So, the big question becomes what kind of a reward is appropriate in order to bring about the correct change in behavior.
One of our past clients is a vehicle manufacturer that works with independent dealerships nationwide. That client needed to incentivize independent salespeople at hundreds of dealerships to sell more of a specific economy vehicle, rather than trying to upsell their customers into something more expensive to earn a larger commission.
In this scenario, there are a couple of variables to consider. First, the target behavior we’re looking to modify is a preference for which vehicle a given salesperson will attempt to talk a customer into buying. These salespeople generally have a tendency to upsell customers whenever possible, and we have to combat that existing behavior. The only way to do this is to ensure that the incentive we’re offering makes it worth their while to change their habit and stop attempting to upsell customers. Simply put, that means doing our homework and making the incentive large enough to counterbalance the added commission that comes along with selling a more expensive vehicle.
Additionally, it might be worth making the incentive additive in order to encourage these salespeople to really zero in on selling the one particular vehicle. This could take on a number of forms, but a straightforward approach to this sort of incentivizing might involve setting extra bonus rewards at various levels of monthly sales. For example, a salesperson receives a fixed amount per vehicle sold, plus an extra fixed amount every time they sell five or more of those vehicles in a month.
Aside from needing to address the disparity between the commission on a cheaper vehicle and a more expensive one, something else to take into account when trying to set the right reward is the sheer value of the transaction itself. Let’s assume that we’re not even trying to incentivize a salesperson away from selling a more expensive vehicle and towards selling a cheaper one. Rather, let’s say that we want them to sell our client’s economy vehicle over a competing economy vehicle. In this case, their commission would be roughly the same either way.
That said, chances are good that we won’t have much of an impact on behavior if we make our incentive a $10 reward for every $20,000 vehicle sold. Assuming the salesperson’s commission is several hundred dollars or more, that $10 reward is a drop in the bucket.
On the flip side, though, a small incentive—such as $40 or $50—might have an incredibly dramatic impact on someone selling a lower-ticket item. If you offer a salesperson $50 for every $1,000 TV they sell, you’re likely to have a major impact on their behavior. Closing the deal on a $1,000 TV isn’t nearly as involved or time-consuming as convincing someone to buy a $20,000 car.
When determining the value of an incentive, it’s also important to take into account the overall compensation package of the employee. For example, consider the salesperson who regularly earns $100,000 or more per year. Incentivizing a particular sale with a $10 bonus will likely have a negligible effect on such a person. On the flip side, a small incentive for someone who’s earning close to minimum wage could be a huge behavior modifier. For example, one of our clients provides small incentives as low as $1 for upselling customers on certain maintenance products. These salespeople earn just above minimum wage and, because these transactions are so plentiful, they can theoretically earn up to $5 extra per hour if they upsell each new customer. That’s an incredible opportunity!
That said, it’s also essential to consider how the incentive will fit into your bottom line overall. Chances are good that any given company will have far more employees and partners on the payroll who are earning close to minimum wage than those who are earning six figures. Incentivizing too many employees at the lower end of the pay scale—even with small incentives—can result in a relatively large expense for the company. Additionally, it could have a kind of boomerang effect further down the line once the incentive is removed or changed. If low-income employees have grown accustomed to increasing their wage with a particular incentive, they may resent it when that incentive eventually disappears.
For these reasons, it’s incredibly important to find the sweet spot: An incentive that’s perfectly matched to the department, the employee, that employee’s salary, the behavior in question, and the desired outcome. Balancing this equation isn’t always easy, but working with partners who can bring a lot of experience to the table definitely increases the likelihood of success.
Don’t Let Your Ego Get In the Way
At this point, we’ve talked about two major pitfalls: Mistakenly placing caps and quotas on employees and failing to match the appropriate reward with the desired change in behavior. There’s one other big mistake that we tend to see companies make, and it’s an expensive one.
When we say expensive, we don’t just mean figuratively. We mean literally. We’ve seen companies quickly lose market share when they do this, and recovering can end up costing them in lost time and lost revenue.
We’re talking about ego.
To be frank, some companies let their ego get in the way and miss out on a ton of sales—and alienate customers.
Some companies are so convinced that their product is amazing—indispensable, even—that they laugh at the idea of incentivizing. Why do they need to incentivize their customers to buy? People will buy because the product is just that good. Why should they incentivize their sales team to sell more? Their team’s already getting a commission, plus the product sells itself. Why do they need to worry about incentivizing HR, customer service, product development, or any other department? They know what they signed up for, they agreed to their salary, and besides, the product is going to fly off the shelves because people won’t be able to live without it.
The other scenario that we’ve seen involves a new C-level executive coming onto the scene. As part of their initial review of company processes, they notice all the incentive programs in place —programs for their sales team, rebates for new customers, incentives for returning customers, bonuses for customer service… on and on. As part of a whole host of changes that they’re looking to implement, they decide to wipe the slate clean. Who needs all these incentive programs, anyway? Don’t people know that they’re being paid a salary? Don’t customers understand how good this product is, and how much they need it?
In no time flat, these companies lose market share. And the next thing you know, they’re scrambling to put all of those incentives back in place.
What’s the takeaway here?
If you’ve never put an incentive program in place, don’t discount it out of hand. We assume you don’t fall into this category if you’re reading this article , but there’s a good chance others in your organization don’t necessarily agree with you on this. Some people have a tough time understanding just how effective incentives can be until they see them in action for themselves. Incentives are quite possibly the most powerful tool available for increasing revenue, expanding your market share, and attracting and retaining more customers.
If you have incentive programs in place, pull them at your own peril. There’s nothing wrong with tweaking a program that’s already working to make it better, of course. As we’ll discuss below, making ongoing adjustments to an existing program is part of what it takes to be truly successful. But, don’t let someone walk into the boardroom and pull the rug out from under all of your existing incentives. The consequences could be serious.
Staying Up To Date
So, you know that you need to avoid caps and quotas. You’re going to be sure that your incentives are appropriate for the given department, employee, customer, and/or behavior that you’re looking to modify. And, you know how dangerous it can be to discount incentives altogether, or to cancel existing programs that are working.
There’s one more important thing to remember, though, when it comes to effectively modifying behavior. Everything that we’ve discussed so far can be thought of as essential to the initial lead up and execution of a solid incentive program. This last piece of advice is what you’ll need to follow if you want to keep things running smoothly in the months and years to come.
Simply put, you’ve got to stay up to date. Incentives are just like any other part of your business. They can’t be implemented and then put on autopilot indefinitely. Sure, some incentive programs can drive themselves for a while. But, eventually, you’ll need to step in and make tweaks and updates as appropriate.
Think about it like this: Would you let your product development team kick up their feet on the desk because you have a successful product on the market? Of course not. Your competition is going to respond to whatever it is you’ve just released, and you can fully expect to lose market share if you don’t continue to innovate.
Would you be comfortable with your marketing department continuing to “do what they’ve always done?” No way. In the age of digital marketing, what works this month might not work next month. You fully expect your marketing team to stay abreast of the latest developments in the marketing world, engaging your customers in a multidimensional way across every available platform.
In the same way, your incentive programs should be tweaked and updated on an ongoing basis. Never get too comfortable. If something’s working, congratulations. That’s a good thing. But you can’t assume it’s going to continue to work forever. In fact, you should assume by default that it won’t continue working forever. In this day and age, nothing does. Things change in the blink of an eye, and your incentive program needs to be able to do the same.
On one level, this involves regularly re-evaluating both the success of your program, as well as how you’re measuring that success. What are your KPIs (Key Performance Indicators)? Are they in keeping with your goals? If your goals have shifted, the way that you measure success may need to shift, too.
Just as importantly, you must make sure your software is up to the task of adapting to changes in your program. When you’re ready to implement something new into your current incentive program, is your software going to be able to respond? Or will you end up feeling hampered by technology that can’t meet your needs? The last thing you want is to find yourself in a position where you must regularly switch platforms or providers whenever you want to make an adjustment in how and what you’re incentivizing.
For these reasons, it’s mission-critical that your incentive platform, including your software, processes and payment methods, remains agile enough to keep up with the changing times.
Incentives are aimed at behavior modification, plain and simple. You now should have a much clearer sense of exactly how to achieve the new behaviors that’s you’re looking for in your team. By avoiding caps and quotas, matching the right reward with the right scenario, keeping your ego in check, and staying up to date, you’re well on your way to success.