A growing number of high-profile legal cases make a painfully clear point: aggressive, revenue-only sales incentive plans can lead to unethical sales behavior, customer backlash, and punitive governmental fines and regulations.
The most infamous cases involve Wells Fargo, GlaxoSmithKline, and Purdue Phama in the USA, Lloyds Bank in the UK, and Australia’s four largest banks. And the reverberations are spreading, moving from pharmaceuticals to medical devices, from retail banking to life insurance, from manufacturers to distributors, and from corporations to their consulting firms.
The sheer magnitude of legal settlements and penalties is sobering: $4 billion for Wells Fargo, $3 billion for GalxoSmithKline, $3 billion and bankruptcy for Purdue Pharma, $46 million for Lloyds of London, and so on.
What is the Central Complaint?
All of these cases involved sales compensation plans with two common factors. First, the sales incentive plans were judged to be too aggressive. Incentive pay represented a substantial portion of total take-home pay. For example, a 10% of salary bonus is not aggressive, but 50% or more of total sales compensation coming from a variable pay-for-performance plan is consistently viewed as highly aggressive.
Second, the plans universally emphasized revenue-related metrics to the exclusion of customer-centric measures such as customer satisfaction or net promoter score. Some of the fined companies measured sales revenue, others measured units sold, and still others measured market share. But in all cases, short-term, income-related factors drove the sales compensation plans and rewarded salespeople for focusing exclusively on company interests.
In the end, the core issue surrounding aggressive, revenue-only sales compensation is harm to customers. Well Fargo salespeople preyed on elderly or unsophisticated customers. GlaxoSmithKline salespeople promoted an antidepressant for children even though that application was not FDA approved. Purdue Parma salespeople downplayed the addictive side-effects of Oxy-Contin and ignored the obvious signs of widespread abuse and addition-related deaths.
If nothing else, these companies are now posterchild examples of how aggressive and unbalanced sales compensation plans can encourage salespeople to do real harm to customers.
Various design aspects of sales compensation can contribute to aggressiveness. Three of the most important are discussed below:
This is the percent of target cash compensation derived from incentives. Be wary if the average sales force percentage approaches or exceeds 50%. Also watch for consistently high pay-at-risk for your top performers.
2. Super-Stretch Quotas
If you regularly over-assign quotas by 10% or more, you may be encouraging salespeople to engage in unethical practices to hit their number. For example, if next-year’s territory sales forecast is 5% growth but you assign a 20% growth quota, then you may be pushing too hard and inadvertently encouraging unethical sales behaviors. While the over-assignment might help the sales manager look good at the end of the year, aggressive over-assignment might expose the company to unwanted accusations of questionable sales compensation practices.
3. Super-Acceleration Points
If your payout rates double or triple after performance hits certain levels, then you again may be encouraging unethical sales practices. While such accelerators do not impact the whole sales force, they can be particularly problematic if they push your top performers into the red zone of unethical sales behavior. For example, they can push salespeople to “time” the sale to their personal advantage, without due consideration of what is best for the customer.
The posterchild cases make a clear point: If you have a highly aggressive sales compensation plan that exclusively emphasizes revenue, then your risk exposure increases. Risk exposure decreases for a company with a moderately aggressive pay plan that balances company- and customer-centric metrics.
If your industry has not been the target of legal action related to sales compensation plans, remember this: There can always be a first, and a second almost always follows. So, if your industry typically uses aggressive, revenue-only sales compensation plans but has not been subject to a major legal action, you may not be in the clear. All it takes is one large, disgruntled customer in your industry, or one class action lawsuit, to eventually cause great harm to your company.
Another risk of not anticipating concerns about aggressive, revenue-only sales incentives is a future loss of flexibility. For example, Wells Fargo eliminated all individual and product-related performance measures for retail banking. While this may be an ideal compensation approach for them, it also may not. Its competitors use individual and product performance measures. It could be the new Wells Fargo plan was the only viable option given tremendous regulatory and consumer pressure to eliminate all vestiges of its former, highly aggressive sales culture.
In Australia, Westpac cut all incentives and went to straight salary for tellers. While this may be a great move for them, it also may be an accommodation to address tremendous governmental and public scrutiny. Its rival, ANZ, did not retreat as far. ANZ now pays team bonuses and shifted some targeted variable pay into salary. Time will tell which approach produces the best results for both the bank and the customer.
The lesson here is a familiar one: If you anticipate the problem, you have more control over your destiny. If you wait for troubles to reach your doorstep, your options diminish quickly.
Customer-Centric Measures are Good Business
Companies increasingly realize that a singular focus on profits is unwise. Employees—especially millennials—are inclined to vote with their feet. They tend to seek and stay with employers who find constructive roles for the company and employees to play in communities and society overall.
Managing for high levels of customer satisfaction is good for profits. For example, Bain & Company found a strong positive connection between organic growth and net promoter score.
In today’s world of consolidation, the Pareto Principle is often present, where 80% of revenues come from 20% of customers. This makes key account satisfaction and retention especially important. If you lose a big account, you not only lose considerable revenue and profit, the word gets out and there can be a domino effect.
With the considerable evidence now available about the link between customer satisfaction and long-term financial competitiveness, the question in front of every sales force should be: What is the opportunity cost of not including customer-centric metrics in our sales compensation plan?
Yes, there are benefits to having a simple incentive plan focused exclusively on revenue. But, what do we lose in terms of long-term profits, and what risks are we exposed to by not including customer-centric measures in the sales compensation plan?
Adding a new performance measure to a sales compensation plan is difficult. The new measure needs to be created and reported to the field. A history of performance needs to be established. A new incentive component needs to be designed and integrated into the sales comp plan. None of these steps are trivial and they place new demands on multiple departments, including Sales Operations, IT, HR and so on.
On the other hand, it is now easier than ever to create, track and report customer-centric measures.
- CRM (customer relationship management) systems can track number of complaints, cases created, compliance scores, rolling net promoter score, training certifications, and so on.
- Incentive compensation management (ICM) systems can integrate with CRM to produce customer-centric sales incentives.
- Sales performance management (SPM) systems can help executives set proper quotas for customer-centric measures.
- Advanced CRM, ICM and SPM systems provide analytical tools, including AI (artificial intelligence), to help identify which customer-centric measures best predict customer retention and even lifetime value.
- Most of these systems provide dashboarding so that salespeople, sales managers, and the C-Suite can stay constantly informed on progress or problems with customer-centric performance levels.
Advanced sales management systems make the addition of new, customer-centric incentive measures far more feasible. They reduce the downside risks of introducing an ineffective or problematic new incentive measure. And, they can help you ensure that customer interests are well represented in the sales compensation plan.
There is no perfect causality between a particular compensation plan design and unethical sales behavior. Indeed, many industries have used aggressive, revenue-only sales compensation plans for decades without penalty.
That said, the infamous cases cited above did not hinge on proving sales compensation solely and directly caused sales misbehavior. Indeed, company culture was consistently targeted as the leading culprit. But the cases are now widely seen as proof that aggressive, revenue-only sales compensation plans were a key enabling factor.
As sales executives have always known, sales incentives are powerful, and they work. They can play a critical role in delivering results. All powerful tools must be managed wisely to minimize risk exposure and balance short-term with long-term opportunities. It is now time to reevaluate whether highly aggressive, revenue-only sales compensation plans are well aligned with the big strategic picture.
Erik W. Charles has over two decades of experience in marketing. He focuses on helping companies drive expansion and growth by better aligning positions, responsibilities, and incentives. He brings a multitude of skills ranging from multinational enterprise firms to small startups, allowing him to craft different models depending on the market, people, and corporate goals.
As the Vice President, Solutions Evangelism at Xactly, Erik serves as a subject matter expert in the area of Sales Performance Management to ensure that Xactly’s marketing, sales, and product teams have the necessary strategic input for industry-leading messaging, positioning, and future direction.