It may be time for employers to reconsider sales bonus structures, with recent research from the Harvard Business Review shedding fresh light on the sometimes tricky issue of staff compensation.
The research, undertaken by professors Doug J. Chung and Das Narayandas, recommends employers base their approach to compensation “less on intuition and conventional ‘wisdom’, and more on hard, quantitative data”.
Under a randomised field experiment conducted at a large Indian company, 80 full-time salespeople were assigned different weekly bonus schemes, which were awarded conditionally or unconditionally.
The researchers found that “conditional bonuses were, on average, more than twice as effective as the unconditional bonuses”. Conditional compensation resulted in a sales increase of approximately 24%.
The salespeople were assigned to different conditional bonus treatment groups: standard, punitive and real-punitive. However, little difference in effectiveness was found between standard and punitive treatments.
“This finding runs counter to loss-aversion theory, which stipulates that people’s desire to avoid a loss will be stronger than their desire to attain an equivalent gain,” the researchers note.
“Our results also indicated that a conditional bonus could potentially demotivate salespeople over time: salespeople’s performance was higher during weeks of a bonus treatment but lower in weeks after a bonus treatment.”
Meanwhile, unconditional bonuses, awarded according to a delayed or immediate treatment, were found only to be effective when distributed as a delayed award. Bonuses awarded at the beginning of a sales period had no significant effect on performance.
It may also be that different bonus systems are better suited to different staff. The researchers noted that unconditional bonuses tend to be more effective for salespeople with a higher base performance, while conditional bonuses were equally effective across all types of performers.