Carrots for lunch?
The stick and the carrot refer to the means by which we influence people, either through punishment or rewards. Sticks and carrots are of vital importance to organisations as they have a disproportionate impact on teams’ happiness at work, and therefore culture.
In many organisations, incentive misalignment is an issue. Unfortunately, incentive schemes are rarely questioned, often because talking about how people get paid is a very emotional topic, best left untouched. As a result, most programs tend to focus on curing symptoms rather than the source of the disease.
I would argue that if culture eats strategy for breakfast, then surely it eats carrots for lunch. After all, they say you are what you eat.
Framework for incentive setting
Many organisations rewards sales teams for hitting their targets. Whilst incentive schemes can be a great way to boost sales team effectiveness, there are inherent difficulties in designing them well. I suggest asking these four questions:
1. Is it aligned to organisational objectives?
2. Is it simple?
3. Is it fair?
4. Is it sufficiently large to motivate performance?
1. Is it aligned to organisational objectives?
Does your organisation have profitability issues? This is actually a trick question… it does. The more profitable a business is, the richer the stakeholders and the safer everyone’s job is. So do not just focus on revenue, but also look at integrating price achievement measures. The exception to this rule is environments where there is little if no discount discretion. In those circumstances, a revenue goal is usually sufficient. Organisational objectives are not always just tied to revenue however, and can also include acquisition or retention measures. Never forget a team has more chances of success if everyone is rowing in the same direction.
2. Is it simple?
Is it easy to understand and calculate? To work as intended, a scheme must be clear to the recipient. You need to know what your target is, and what rewards are attached to hitting it. You also want to be able to quantify the extra rewards you may unlock for over-performance. The rule of thumb is that if you can’t work it out with a simple calculator in less than 30 seconds, chances are you’ve over engineered your incentive scheme.
3. Is it fair?
Does everyone get a fair shot at the reward? To ensure an optimal level of fairness, centralised target setting using clearly defined guidelines which take into account customer behaviours is recommended. You do not want team motivation to drop because everyone thinks a particular “high achiever” benefited from soft targets, or was just given a patch that naturally outperforms others. Hard work and talent need to be rewarded, and while chance certainly plays a role, it should not be the main actor.
4. Is it sufficiently large to motivate performance?
Is the reward big enough to matter? At one extreme, jobs that have no base component and only sales bonus clearly motivate people to sell. Their livelihood depends on it. At the other extreme, no incentive scheme means an organisation is entirely dependent on its employees doing their jobs, and while organisation can sanction under-performance, high performance is hard to achieve at scale in such environments. A target should always stretch performance, and reward employees accordingly. So a big hairy audacious goal should offer extremely high rewards. Ask yourself what percentage of the team will receive a reward. Do you want to breed a winner takes all culture or a team achievement one? Never forget however the bigger the reward, the lower your margins.
Management incentives
The first point of the framework touched on organisational objectives. Executive incentives are extremely important in shaping the culture of the boardroom. How you reward the people at the top will affect what they care about and will flow down the pyramid.
Companies that are sales centric, are usually so because executives are mostly focussed on revenue performance to hit their rewards. Changing incentives down on the sales floor is not the solution when boardroom incentives are misaligned.
The consequence of a mindset bent on revenue maximisation is a shift towards selling at any cost when objectives are not met. In these types of organisations discounts are rampant, cost visibility is opaque, and ultimately margin suffers.
The solution is to ensure the customer is always top of mind in the boardroom. By giving executives customer experience targets or customer retention targets, to complement revenue or profit objectives, an organisation will breed a customer centric culture. Any other type of corporate culture is bound to fail in the long term.
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