Abstract
The attractiveness of the pay policies of sales organizations can be increased by higher levels of match between individual characteristics of sales people and those of the compensation structure. Sales organizations should consider the career life cycle stages of sales people when devising compensation strategies. One type of sales compensation plan does not match all stages of career life cycle for a sales employee. Sales organizations can tailor expectations, motivations, reward strategies, as well as compensation structure according to career life cycle stages. To maximize sales force productivity and hence profitability of the sales organization, sales organizations should strive to find an optimal set of pay mix to motivate sales employees at each stage of career life cycle. This article provides various frameworks for analyzing impact of career stages on salesforce performance. This research identifies diverse variables impacting pay mix of sales employees and suggests a practical approach for enhancing productivity of sales employees across career life cycle stages.
Introduction
Sales managers are always looking for creative ways to motivate their sales teams. Effective sales compensation systems are pivotal in terms of the attraction, satisfaction, motivation and retention of sales employees. The changing needs of customers, shortened product life cycles and the increased pressure to enhance profitability have motivated HR managers to identify and implement effective compensation plans for sales employees. 1 Although, the importance of effective sales compensation plan is widely recognized by researchers, academicians and practitioners continue to question the type of compensation plan that is most effective. Sales organizations fiddle constantly with their sales compensation plans. However, when sales targets are missed, they blame the sales compensation plan as ineffective.
The finance department, meanwhile, views the compensation plan as an expense to manage. That’s not unexpected. Expenditures for sales force compensation comprise a large portion of many organizations’ operating expenses, sometimes as high as 50% of sales. U.S. companies alone spend an estimated $800 billion on their sales forces each year. So naturally a finance department will try to ensure that compensation plans have cost control measures designed and build into them.
Most employees in an organization are paid a base salary that represents all or a high percentage of their compensation and can be readily managed. But as sales jobs are different from other functional jobs, sales employees need to be compensated in a way that will motivate them to produce high amounts of sales revenue. The attractiveness of the pay policies of sales organizations can be increased by taking into account the individual characteristics of salespeople. Hence, sales organizations should consider the career life cycle (CLC) stages of salespeople when devising compensation strategies. In this context, a career is defined as the evolving (or unfolding) sequence of a person’s work experiences over time. Sales organizations can to some extent, tailor expectations, motivations and reward strategies, as well as compensation structure according to CLC stages.
CLC: Key Features
Every sales organization needs to understand sales employees’ compensation costs and the opportunities for controlling these costs. This means understanding all the internal as well as external forces that affect compensation costs. The organization needs to judge various issues carefully in sales force compensation design and develop an effective compensation strategy. Effective compensation strategies enable organizations to attract, retain and motivate the salespersons they need. A deeper understanding of salesperson motivation will help managers maintain sales force effectiveness through appropriate sales force management practices 2 and prompt the deployment of different compensation strategies.
An individual’s career moves through different stages of life cycle over time (usually as one ages), similar to the biological model of growth, development and decay. 3 The careers of, sales employees progress through four broad stages—exploration, establishment, maturity and disengagement. Each stage is characterized by unique career concerns, developmental tasks, personal challenges and psychological needs. Such challenges and needs are considered to be fundamental to understanding individual behaviour attitudes and motivation across their CLC.
During the different stages of CLC, some salespeople demonstrate greater ability, internal drive and performance level than others. Depending on the life cycle stage, salespeople will respond to different compensation models.
The performance of salespeople can be divided into four categories: learners, laggards, stars and stable performers. Individuals in each category are motivated by different facets of rewards and compensation plans. Hence, organizations that take individual differences into account will realize better results from the individuals in each category—and see a higher return on sales force investment (ROSI). The focus of this research is to discuss how sales organizations can deliver greater ROSI by considering the life cycle stages of sales employees and ultimately elevate the performance level of each salesperson. All sales cost should be evaluated to determine if justified by ROSI.
As background consider the increase in support costs for sales employees as their career unfolds. One large chemical company estimated, for example, that it cost $800,000 to support and compensate one of their technical salespeople for the first 10 years of employment. After 20 years, the total investment was estimated to have risen by a whopping 300% to over $2.4 million. 4 The ROSI on that investment depends on the productivity of the sales force.
Achieving the requisite productivity from this investment will depend on understanding how people change and develop over the CLC, starting with their initial entry into a sales organization, as explained below with illustrations.
The CLC stages represent a fundamental difference in how salespeople react and behave on the job and understanding those differences helps sales organization in effectively managing salespeople. The sales organization should look at the life cycle stage of sales employees as well as how long a salesperson has been at the company and at the tasks being performed when designing effective compensation plans.
Each salesperson’s career moves through the different stages of CLC—exploration, establishment, maturity and disengagement—and he or she can repeat a stage or the entire cycle any number of times, typically by changing employers. The stages are not clearly delineated, but they definitely occur. The time interval of each stage is determined by a complex interaction of personal, management and environmental variables. Management views the shape of a salesperson’s CLC curve in terms of the revenues and profits produced by that salesperson. The CLC represents age and performance relationship in a pattern similar to a product life cycle curve. 5
It is often difficult to determine the precise stage of the life cycle in which a given salesperson is operating. There have been very limited empirical studies and little conceptual developments available about how salespeople react to choice of pay mix across CLC stages. This research examines how the sales performance varies according to CLC stage and explores pay mix (e.g., fixed vs. variable) decisions sales organization should design according to career stage of sales employee.
Type of Rewards and CLC Stages
The behavior of salespeople in the organizations is determined largely by the way their activities are measured and rewarded. Rewards are a way of guiding salesperson behaviors or outcomes that are most important to the organization. Previous studies have shown that different employees are attracted to and motivated by different rewards. 6 Rewards can be divided into lower order or extrinsic rewards (e.g., pay, job security and fringe benefits) or higher order or intrinsic rewards (e.g., feelings of self-fulfilment, personal growth and career development).
The CLC framework elaborates many concerns specific to each of the four stages of life cycle that discriminates salespeople along important dimensions such as age, behavior motivation, selling skills and role perception. The knowledge of such diversity presents important implications for effectively managing sales force compensation on the basis of their current career stage. The sales compensation plan can be described as a simple payoff between control and motivation. The control element of a salesperson’s pay is salary; the motivational element is commission. 7
A younger salesperson in the exploratory stage is more prone to role ambiguity and lower job satisfaction than an older salesperson. For that reason, the sales organization can motivate younger people by offering lower order rewards (Figure 1). Rather than focusing on behaviors and tasks that are often unobservable in the exploration stage, variable pay allows sales organizations to focus on salesperson outcomes and relates the reward to the salesperson’s performance. Managing salespeople in the exploration stage with outcome-based control can stimulate their interest in learning necessary selling skills. Designing compensation programs around material rewards with more proportion of variable pay would appear to be most effective for the exploration stage of a salesperson. Salespeople in this stage should be given opportunities and flexibilities to experiment with new horizons in order to bring out their potential. Hence, variable pay is preferred as it provides more flexibility (Figure 1).
Types of rewards across CLC stages.
In the exploration stage, if rewards are perceived as control mechanisms, they tend to dampen an individual’s desire for exploration and learning; however, if they are perceived as an incentive for increased effort and good performance, then rewards encourage learning. The greater the reliance on variable pay, the more risks the sales organization transfers to the salespeople. However, the ability in the learning stage to directly control incomes can be highly motivating. In this stage, the salesperson is full of energy, a hard worker, motivated and not yet risk averse and will perceive commissions as an incentive rather than a control. Therefore, a higher proportion of variable pay or commissions used as incentives should be applied in the exploration stage. Early in their careers, salespeople feel that fixed salaries are too low to motivate them.
During the establishment stage, salespeople strive to use acquired skills to produce superior results, and they prefer an environment where they are paid in relation to their opportunity cost (i.e., more fixed pay). In this stage, the salesperson’s performance increases dramatically, and the primary career goal becomes achieving professional success (e.g., promotion) by producing better results. 8 During the establishment stage, sales managers’ timely feedback is a strong motivator and leads to job satisfaction and perceived task enjoyment. Hence, more behavior-based control is preferred in the establishment stage. In this stage, the salesperson is experiencing a high level of psychological success due to significantly improved performance, 9 which should enhance the perceived attractiveness of the job.
During the maturity stage, higher order needs, although still necessary, become less important for salespeople; their focus shifts to preserving their present position and organizational role. Therefore, salespeople place greater value on job security and monetary rewards and have less interest in competition and promotion. In this stage, the proportion of fixed pay may be lower than in the establishment stage. It is important to understand not only preference for reward but also perceptions of those rewards and the relative impact on behavior of salespeople.
During both the establishment and maturity stages of CLC, behavior-based control effectively reduces a salesperson’s role ambiguity, which may indirectly enhance the ease and joy of the selling process. Salespeople in the disengagement stage do not aspire for promotion or career progression. Hence, they prefer short-term benefits or incentives (variable pay) as they like to be compensated through lower order reward for their performance (Figure 1).
Sales Compensation: Impact of Sales Yield and Sales Carryover
The sales yield measures the progress of the sales employee along the sales learning curve over time. The sales learning curve of sales employee summarizes the process of selling the products efficiently. It involves all customer touch points and influences sales yield, defined as the average annual sales revenue per fully trained and effective sales employee. The longer the sales learning curve, the greater the revenue gap—that is, it takes longer for sales yield to reach targeted quota levels. The more the sales employee learns about his or her organization’s products, customers, markets and sales process, the more efficient he or she becomes at selling and the higher the sales yield. The relationship of sales yield and CLC stages of a sales employee is shown in the matrix in Figure 2.
Sales yield and CLC stages.
The exploration stage of a sales employee is also referred to as the learning stage. New salespeople in the exploration stage of CLC initially generate small revenue increases, and accordingly the sales yield for a new sales employee starts out slowly. As time goes by, their impact increases in the establishment stage, stabilizes and flattens out as the sales employee reaches the maturity stage and performance again decreases in the disengagement stage. Accordingly, the sales yield can be illustrated in a classic S-shaped curve.
That happens for a number of reasons. First, new salespeople are not as effective and competent as they will be with experience, as initially they need time to learn the products, markets and selling process and to establish effective customer relationships. Their effectiveness in the first year may only be 40% to 50% of that of a veteran. Second, in markets with long selling cycles, it requires lot of effort before salespeople close sales. Third, many sales situation are not onetime orders but multiyear contracts. Finally, carryover sales—sales that accrue in the future but are the result of sales efforts in the present—represent a significant portion of every sales organization’s long-term revenues. As the sales employee progresses in his or her life cycle, sales carryover will also increase along life cycle (except disengagement stage, as in this stage overall sales carryover will be less than maturity stage; Figure 3).
Sales carryover along CLC stages.
Carryover sales occur when a product meets a customer’s needs, and therefore the customer continues to buy even if a salesperson is no longer involved in selling it. The salesperson in the exploration stage encounters many unknown situations and uncertainties. Hence, sales carryover will be low in this stage. In the establishment stage of the CLC, repeat sales become a larger portion of overall sales. With strengthened customer relationships and brand loyalty, carryover sales will be high in this stage. In the maturity stage, sales carryover is moderately high because of higher sales efforts of the past. In the disengagement stage of the CLC, overall sales carryover will be low again because of diminishing impact of earlier stages efforts.
A straight commission plan is not a fair compensation plan structure for remunerating sales employees’ work and effort in the pervasive case of sales carryover. 10 By moving from paying commissions on every unit of sales (except in certain appropriate situations, e.g., very low sales carryover) to paying commissions only on sales that are driven by the sales force, organizations can ensure better alignment of the sales force’s motivations with organization growth objectives.
The high variable pay with low fixed pay is recommended when sales carryover is low because it results in goal congruence and alignment of objectives between the organization and the sales force. Similarly, high fixed pay with low variable pay is appropriate when sales carryover is high. Any deviation in this pattern with respect to sales carryover and pay mix will result in goal incongruence and misalignment of objectives between the organization and the sales force. 11
Hence, during the exploration and disengagement stages of the CLC, when overall sales carryover and sales yield are low, a higher proportion of variable pay and a lower proportion of fixed pay in the compensation structure are appropriate. Likewise, during the establishment and maturity stages of the CLC, when both overall sales carryover and sales yield are high, a higher proportion of fixed pay and a lower proportion of variable pay in the compensation structure are recommended, as shown in the matrix in Figure 4.
Sales compensation: Impact of sales yield and sales carryover.
Sales Compensation: Impact of Uncertainty Across CLC Stages
The objectives of an effective sales compensation strategy may be to reduce or control overall compensation costs, increase the effectiveness of the compensation strategy and motivate and retain salespeople. An effective compensation strategy should reflect the needs of both the sales employee as well as the organization, leading to improved compensation design and organization performance. Uncertainty of sales and sales force compensation needs can be traced to the CLC stages as represented by the matrix in the Figure 5. Uncertainty of sales is caused by lower sales yield of sales employees during exploration and disengagement stages of CLC (Figure 6). During the exploration stage, sales yield is low (high uncertainty of sales), and hence low operating leverage is preferred until sufficient sales yield is established (low uncertainty of sales), as when the individuals reaches the establishment stage (Figure 5).
Compensation strategy: Impact of uncertainty and operating leverage.
Compensation strategy across CLC stages.
Operating leverage is a function of an organization’s cost structure and defines the relationship between fixed costs and total costs. With regard to sales compensation policy, the best of all strategies with regard to operating leverage is to maintain operating leverage according to stages of the CLC. In times of relative predictability or certainty of sales, sales organizations attempt to build leverage by rebalancing compensation costs with relatively higher fixed commitments in the pay mix, that is, a higher fixed pay proportion is favoured over variable pay. 12 During the establishment and maturity stages, as sales employees increase their sales yields and overall sales performance (Figure 6), sales organizations shift the compensation mix from variable to a higher proportion of fixed pay and increase operating leverage (Figure 5).
In the establishment and maturity stages, high operating leverage can multiply profit growth. The more operating leverage (fixed costs/total costs), the more the operating income will vary with changing sales revenues. The benefits of high operating leverage can be immense for the organization. Organizations with high operating leverage can make more money from each additional sale if they do not have to increase costs to realize more sales. During the disengagement stage, sales yields of sales employee again decrease (Figure 6) with overall decline in sales performance. Hence, sales organizations reduce operating leverage by shifting the compensation mix from fixed to a higher proportion of variable pay (Figure 5).
Illustration
Table 1 shows a hypothetical illustration of a sales organization that realign the fixed and variable pay of the sales force according to the different stages of the CLC. It is very challenging for the sales organization to manage compensation cost of sales employees, as their motivation level and sales performance fluctuate widely across different stages of the CLC. As shown in Table 1, by realigning the pay structure in terms of fixed and variable pay, the sales organization is able to manage compensation cost (as % of sales) of sales employee across various stages of CLC.
Realigning Fixed and Variable Pay of a Sales Organization Across Career Life Cycle.
Source. Calculated by the author.
Building Sales Performance Curve Across CLC: A Practical Approach
Over the years, there is a huge increase in support and compensation costs of sales employees, and hence the real challenge for sales organization is how to achieve and maintain a high ROSI.
Evaluating the performance of individual sales employee in the organization is a complex yet necessary task for sales organizations. Sales organizations should build and develop a knowledge repository of their own field experiences and learn what works best for their salespeople. The first step is to get a clear understanding of their sales performance curve. Ideally, this would be done through software-based sophisticated econometric tools, techniques and analysis; however, an approximation can simply be achieved by calculating each salesperson’s actual performance against sales targets and then creating a histogram of all those data of sales employees (Figure 7).
Sales performance: Histogram.
This exercise will segregate salespeople in terms of their sales performance. The histogram provides a simple picture and rough understanding of whether the performance curve is normal (mostly stable performers and roughly equal numbers of stars and “stumpy”), stumpy heavy or star heavy. As evident from the illustration in Figure 7, the performance curve is stumpy heavy as it is skewed to the left. To confirm this finding, the same exercise is repeated for each sales employee for the period of past 3 years. If the same trend persists, it reflects the impact of the sales employees’ CLC stages on their performance. Hence, it is necessary to understand the influence of CLC on sales performance. To do so, tabulate each salesperson’s age profile and then create a histogram of age data of all sales employees (Figure 8).
Sales employee age profile: Histogram.
As evident from Figure 8, the aggregate age profile of the sales force is skewed to the right as it is disengagement stage heavy. This finding reveals that more sales employees are on the verge of retirement compared to younger sales employees hired in the recent past.
Based on these histograms, draw a chart of the age profile of all sales employees versus aggregate sales performance (Figure 9). Age is an important variable, having an impact on a salesperson’s development of a career. Factors such as a salesperson’s stage in the CLC can affect his or her goals, career transitions, career mobility and the development of potential. Salespersons, in the unfolding of their career, tend to identify their progress in relation to where are at a particular age or stage of their lives.
An aggregate CLC for a sales organization.
This chart shows aggregate CLC for a sales organization. As learners, the performance of sales employees will be low in the exploration stage and increase slowly over a period of time. The salespeople, in the establishment and maturity stages, act as core performers since overall sales performance is significantly dependent on this group. The cadre of core performers consists of stable performers as well as stars. In a typical sales force, core performers usually represent the largest part of the sales force (with a majority of stable performers and a small but elite group of stars). Laggards are stumpy performers and represent a group whose sales performance consistently trails and are on the verge of retirement (disengagement stage).
Accounting for individual differences in performance during different the CLC stages raises the odds that a compensation plan will stimulate the performance of all types of salespeople. Yet very few sales organizations focus on getting the most out of the full range of their salespeople. Instead, most organizations arbitrarily zero in on one of their categories—even though it is their other category performers whose improved performance will make their numbers. This situation can be avoided by properly understanding CLC curve as the shape of the curve will suggest which segment will give the most leverage, if handled effectively.
Suppose an organization has a disproportionate number of laggards or stumpy performers and it corresponds to the disengagement stage, the sales organization may want to focus first on short-term incentives and quick rewards, for example. As this research suggests that performance of salespeople vary considerably according to their CLC stages, sales organizations should separately models the behaviour of learners, laggards, stars and stable performers, within a number of different compensation plans. An optimal pay mix design should be deployed by sales organizations to motivate, influence, control and retain the sales force during different stages of CLC.
Managerial Implications and Conclusion
Although sales organizations devote considerable time and effort to managing their sales forces, few focus much on how sale force compensation needs to change over the life cycle of the sales employee. The CLC can be a valid framework for assessing the compensation plan of a sales force. One type of sales compensation plan does not match all stages of CLC for a sales employee. The CLC has a significant impact on revenue and profitability of sales organizations and hence directly influences sales employees’ compensation costs. Sales organizations that are aware of these effects can plan compensation policy accordingly.
To maximize sales force productivity and hence profitability, sales organizations should strive to find an optimal set of pay mix to motivate sales employees at each stage of CLC. Perhaps the most direct and timely way for sales organizations to obtain this valuable pay–planning information would be to identify the best performing group of sales employees according to CLC stage.
Such findings can be further strengthened by conducting periodic surveys of sales employees to determine the importance they attach to various pay mixes during their life cycle stages. Only regular surveys of pay perceptions of sales employees can provide the confidence needed for top management to design productivity-enhancing pay mix programs according to the different stages of CLC. As explained earlier, considerable insight can be gained by drawing simple histograms of actual sales performance and aggregate age profile of sales employees. Based on this, sales organizations should develop a sales performance curve in terms of age profile of sales employees to identify the best performing group.
The sales employees’ compensation plan should be compatible with the changing perception and motivation of sales employees according to their CLC stages. The properly designed sales force compensation plan will match different types of incentive rewards to each stage of the sales employee CLC in order to create and sustain organizational advantage.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.