Managing Salesforce Performance

Introduction

Salespeople are often the most direct link between an organization and its customers. Compensating salespeople is different from compensating other employees (who work under close supervision) of the organization because of the specific nature of the sales job. They operate in the field, do lot of travel, are often located away from the comfort of corporate or sales offices surroundings and work with little or no direct supervision and guidance from managers. Such uniqueness of sales jobs makes their direct supervision extremely difficult and hence most of salespeople operate through indirect supervision in the form of periodical reports, sales quota, sales meetings and so on. As selling is an independent occupation, effective supervision of salespeople plays a critical role in realizing their full potential. An important aspect of supervision of sales employee is the creation of a motivating environment.

Effective management and motivation of a salesforce is crucial to the success of sales organization. Sales compensation is one of the tools that can be used by sales organizations to manage and motivate the salesforce. The sales compensation system defines the relationship between the sales organization and the individuals who comprise the sales workforce by specifying the terms of exchange. It expresses values and norms to which salespeople must conform and specifies the contributions expected from them as well as the reward salespeople can expect to receive as a result of their performance. Hence, compensation systems are, in effect, powerful mechanisms that serve to communicate desired attitudes and behaviors to organization members. The sales compensation program can act as an agent of change as it directs and molds the actions and attitudes of the salespeople. A carefully designed sales compensation program can ensure proper salesforce focus on market needs and successful achievement of sales organization goals.

Salesforce Control System: Key Concepts

The salesforce control system, as an antecedent of compensation, can be defined as a set of policies, rules and procedures that the organization uses to monitor, direct, evaluate and compensate its salespeople in the performance of their tasks and responsibilities to achieve sales organization objectives. ¹ The purpose of a control system is to guarantee that the organization achieves its objectives while also ensuring that its members behave in the appropriate way.

The measurement of salesperson performance remains a critical and central issue in salesforce management. Its significance is underlined both by the need for information related to sales for effective control—to support decisions on remuneration, promotion, termination and in sales employment disputes ² —as well as the need for management to have some basis to facilitate decision making to improve salesperson performance and enhance sales organization effectiveness. ³

The measurement of performance based on behaviors is concerned with the various skills and activities (such as adaptive selling, teamwork, sales presentations, sales planning and sales support activities aimed to attract, keep or retain customers) that are important to salespeople for fulfilling the responsibilities of the sales job. Outcome measures of performance include the number of products sold, the sales volume and profitability. ⁴ The control mechanism based on this philosophy is considered as a continuum ranging from behavior- to outcome-based control.

A behavior-based system is characterized by a high level of sales manager’s monitoring, direction and intervention in activities of salespeople and subjective and more complex methods of evaluating their performance, typically centered on the salesperson’s job inputs. While an outcome-based system is characterized by relatively little managerial involvement with salespeople and reliance on straightforward and objective measures of results. ⁵

Agency Theory and Salesforce Control System

According to agency theory, each organization consists of a principal and agents. In this article, the sales organization is considered a principal and the sales employee is considered an agent. Conflicts arise in the agency relationship because the principal and the agent have divergent goals and risk preferences and do not always share information (i.e., information asymmetry). ⁶ Goal incongruence leads them to prefer different courses of action during their agency relationship. The goal of both the principal and the agent is maximum utility, each party acting in his or her own best interest. Utility for the principal is related directly to sales and profits, whereas utility for the agent is related directly to compensation and inversely to effort. Hence, according to agency theory, the principal strives for maximum profits, whereas the agent seeks maximum compensation at minimum effort. ⁷

Agency theory suggests that the fundamental goal of sales organizations is to minimize costs and maximize efficiency by choosing between fixed and variable pay compensation for salespeople by determining how easy it is to monitor their job performance (behaviors vs. outcomes). The complexity in creating such a compensation plan is how to structure it so that it is beneficial to the salesforce as well as the organization. Agency theory predicts that, depending on the nature of the principal–agent relationship (behavior based or outcome based), the type of contract between a salesperson (agent) and an organization (principal) will align the two parties’ interests.

Designing an appropriate salesforce control system to motivate and direct the salesforce is an important goal of all sales organizations. Sales organizations have two main instruments, namely, behavior based (monitoring) and outcome based (incentives), through which they can control behavior of their salesforce. When such contract is outcome based, the agent is more likely to behave in the interests of the principal, maximizes his or her sales commission and at the same time maximizes individual contribution to the organization’s profits. Therefore, principals can motivate agents by controlling their incentives. ⁸

In the case of complete information, the behavior of the agent is observed, and hence a behavior-based contract is optimal. In the case of incomplete information, the agent is aware of his/her behaviors, but the principal is not. A dilemma arises because the principal cannot determine if the agent has behaved appropriately. In the case of incomplete information, the principal has two options. The principal can purchase information about the agent’s behaviors and reward those behaviors. This requires the purchase of surveillance mechanisms. Alternatively, the principal can reward the agent based on outcomes as they are surrogate measures for behaviors. ⁹

Agency theory addresses the issues of “moral hazard” and “adverse selection.” Moral hazard is the tendency of a sales employee who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior. It arises when a sales employee (i.e., an agent) can take certain actions that will affect both parties to the transaction but that the other party (i.e., sales organization) cannot monitor or strictly enforce, which encourages undesirable behavior by the salesperson. Moral hazard refers to the lack of agent effort and arises when the principal can judge the agent’s optimal behavior, but is unable to observe it (also called as an incentive problem). ¹⁰ The problem of adverse selection arises when the salesperson knows more than the principal. Adverse selection refers to the misrepresentation of ability by the agent. ¹¹ This problem occurs when the principal can observe the agent’s behavior, but is incapable of judging the optimality of that behavior (also referred to as a monitoring problem). ¹²

Agency theory addresses the relationship problem of how the organization can control the salesforces’ activities to enhance efficiency and make the goals of the principal and agent congruent. Hence, the agency theoretic approach focuses on determining that optimal compensation contract which governs the relationship between the sales organization and its salespeople. Agency theory examines the tradeoffs necessary to reach efficient solutions between the costs of measuring and monitoring the salesperson’s behavior (to resolve adverse selection) and the costs of measuring optimal output (to resolve moral hazard) under conditions of information asymmetry. ¹² In summary, agency theory suggests two underlying strategies of salesforce control: behavior based and outcome based.

Behavior Versus Outcome Control System: Key Differences

In relying on behavior control, sales organizations may dictate how salespeople make sales (new accounts or repeat business due to higher customer satisfaction), implying that their job is not only about meeting sales quota but also about the ways to achieve it. Behavior control is facilitated by monitoring as there is high level of managerial intervention and deployment of subjective measures of inputs. Outcome control is influenced by incentive plan design as there is little monitoring and managerial direction. Outcome control rewards salespeople for what they produce, thus encouraging them to do whatever it takes to achieve sales target.

Under a behavior system, salespeople are expected to perform as the sales manager requires, providing for long-term success of the organization and better cooperation between salespeople and are more committed to serve the organization. They have higher levels of intrinsic motivation and motivation by peer recognition. Their sales techniques are more open and customer-oriented, using product knowledge and expertise. The behavior system is both objective and subjective and is based on the sales managers’ perceptions of their salesforce, while outcome system is more objective and is related to the number of sales and sales costs. A behavior system evaluates the salesforce in light of the selling process, while outcome system evaluates the salesforce in light of results. Table 1 shows key characteristics of behavior as well as outcome-based control systems.

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Table 1.

Key Characteristics of Behavior- Versus Outcome-Based Control Systems.

Behavior control	Outcome control
1 More structured with salesperson’s behaviors as performance criteria	Low to little structure with sales performance as performance criteria
2 Sales manager monitors behavior (methods or process) used to achieve results such as closing ability, services performance, calls made, number of active accounts and sales strategies, more than outcomes as salespeople are accountable for their behavior (with the hope that results will eventually follow)	Sales organization monitors results (outcome) such as sales volume, sales unit volume, gross margin, net margin, sales expense ratio and profitability, more than behavior as salespeople are accountable for their outcome and not behavior
3 Much direction, supervision and many managers (low span of control)	Little direction, supervision and few managers (high span of control)
4 Much contact with sales manager	Little contact with sales manager
5 Much reporting	Little reporting
6 Salespeople make final decisions	Sales managers make final decisions
7 Performance evaluated subjectively on many criteria	Performance evaluated on a few observable results
8 Sales organization bears risk	Sales employee bears risk
9 Compensation strategy: fixed pay (salary) is higher proportion of compensation structure—Keyed to customer-generated results	Compensation strategy: variable pay is higher proportion of compensation structure—Keyed to sales-generated results
10 Behavior of salesperson—More ethical	Behavior of salesperson—Less ethical

Source. Tabulated by the author.

Salesforce Control: Key Dimensions

Salespeople carry out diverse job activities related to sales and support. Some activities may be directly linked to generating sales (e.g., product, technical and company knowledge, sales presentation, selling skills, professional competency, number of calls made and selling strategies of salesperson), while some activities may be less directly related to immediate sales goals (e.g., sales support and customer services). All these diverse activities require different performance approaches. The measurement of performance of the salesperson has two key dimensions, comprising behavior performance and outcome performance (Figure 1). Behavior performance consists of the behaviors employed by salespeople in meeting their job responsibilities as salespeople have more control over their activities and strategies than the outcomes of these actions. Outcome performance relates to the sales results directly attributed to the salesperson.

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Figure 1.

Salesforce control: Key dimensions.

Behavior controls emphasize sales behaviors and typically involve extensive monitoring and directing feedback to salespeople about their behaviors in performing the sales role. Outcome controls focus on immediate or short-term end results such as sales volume, revenue or quota attainment for monitoring and evaluating sales performance. Hence, behavior control emphasizes long-term orientation of salespeople while output control encourages short-term orientation of salespeople (Figure 1).

The difference between short-term and long-term outlooks of sales employees creates a conflicting situation for them. Hence, salespeople always feel the tension between serving the need for immediate payoff (focus on higher sales volume) and serving the customer with focus on higher customer satisfaction (Figure 1). That is because a sales organization’s controls, specifically behavior-based control versus outcome-based control, are in conflict with one another. This misalignment invariably creates problems in sales organizations as strategy suffers and execution fails. To solve that problem, a holistic salesforce control system can improve alignment between salesforce control systems and improve overall performance of sales functions.

A behavior-based control system requires a greater degree of close monitoring, extensive directing, input-based evaluating and rewarding by sales managers, with a higher proportion of fixed pay or salary (Figure 1). A behavior system gives sales managers more control over the sales process, rewards effort as well as results, rewards less tangible aspects of sales performance and directs salespeople to adopt behaviors without having to convince them of their profitability.

In contrast, an outcome system may lead to undesirable salespersons’ behaviors, such as selling low-profit items or prioritizing sales over customer service. Furthermore, the salesperson may be disinclined to take part in nonselling tasks. Hence, an outcome system does not always reflect effort, superior customer service or long-term relationship building. An outcome system requires little direction and less frequently monitoring of activities and is supported by rewarding with a higher proportion of variable pay (Figure 1) based on selling outcomes, that is, sales growth, profitability and market share.

Limitations of Outcome-Based Control: Short-Term Behavior of Salespeople

Behavior-based control enhances salesperson’s willingness to perform activities that contribute to long-term rather than immediate outcomes typically based on easily measured, short-term results. However, outcome-based control enhances salesperson’s inclination to perform tasks generating results in the short term. There are two explanations for time-related salespeople behaviors tied to a particular time frame horizon: “individual trap” and “individual fence,” which help explain the short-term orientation of salespeople that is often triggered when they are compensated with variable incentives. ¹³ The individual trap occurs when gains experienced in the present cause a person to engage in an action even though long-term consequences are negative. Hence, because they are paid on an incentive basis, salespeople pursue immediate outcomes by minimizing service and selling to current accounts, even though the long-term consequence of those behaviors is detrimental to new client development.

Similarly, the individual fence may operate, thereby causing salespeople to avoid actions that would result in short-term losses despite anticipated long-term gains. For example, salespeople may decide not to sell new products or engage in prospecting, which create short-term costs, because they discount the long-term benefits of these activities. In keeping with those predictions, the sales organization emphasizes salary when they want their salespeople to adopt a long-term orientation to realize future sales. ¹⁴

Hence, a fixed salary will prevent salespeople from falling in the individual and fence traps because it neither creates short-term gains (i.e., commissions) related to the individual trap nor induces short-term losses (i.e., sell new products or prospecting) related with the individual fence. Thus, fixed pay plans will be more attractive to sales managers concerned with the long-term orientation of their salesforces than pay for performance (variable pay) plans.

Behavior Control Versus Outcome Control: Major Benefits and Limitations

Sales organizations must decide whether the performance of salespeople is measured based exclusively on their output or whether their behavior is also factored in to some extent. Thus, sales organizations should consider the advantages and disadvantages of each type of measure. The particular salesforce control system depends on a series of variables or situations that make one system more suitable than another. Which type of control is adopted depends, among other aspects, on how easy it is to observe the outcome obtained by the salespeople, the ability to define the way salespeople operate, the skills they need to perform their job correctly and the degree of uncertainty of environment in which they have to operate. Key considerations for the selection of behavior-based control versus outcome-based control are given in Table 2.

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Table 2.

Selection of Behavior Control Versus Outcome Control: Key Considerations.

Behavior-based control	Outcome-based control
1 In some companies, certain sales transactions have an air of predictability or presale momentum. Also, firms with the biggest advertising budget or the lowest price usually take a commanding lead over its rivals. In these situations, behavior control is used.	In competitive market situations where sales are open and it is hard to forecast who will win, a good salesperson can sway decisions. Hence, in this scenario, an outcome system can inspire salespeople to work their hardest and think more creatively.
2 When salespeople lack experience, behavior-based control is preferred as inexperienced salespeople may sell the wrong products to the wrong people in the absence of monitoring.	When a sales organization lacks resources and the selling environment is competitive. As sales are unpredictable, it is hard to forecast who will win in the competitive environment.
3 When the sales organization needs to protect its brand by controlling how salespeople present its products or services to customers, e.g., pharmaceutical and chemical industries, they should rely more on behavior systems to manage their salesforces as misrepresentation, either by omission or commission, is unacceptable.	When the sales organization needs to protect/grow market share by encouraging seasoned salespeople to grow sales. However, a sales organization requires an excellent accounting system that is timely, accurate, and appropriate for an outcome control system to work effectively.
4 When sales organizations want salespeople to contribute to high non–sales priorities, such as marketing strategy and new product development. Behavior system alleviates the burden of closing sales and directs efforts toward future sales.	When salespeople’s skills and knowledge—not pricing policy or advertising budget—determine whether sales organization closes sales. The outcome-based control fits when salespeople are key driver of results and salesforce elasticity is high (i.e., changing salespeople would have a big effect on results).
5 When team selling is a major part of the selling process and hence sales records do not quantify each salesperson’s contribution, which means a workable variable-pay compensation strategy is not possible.	When there are many ways to close the deal. It works well when salesperson knows that many different behaviors can be effective in generating results. Hence, it is difficult to fully measure and monitor each salesperson’s behavior, so a workable fixed-pay formula is not possible.

Source. Tabulated by the author.

Salesforce Control and Performance Measures

Sales organizations with behavior-based control systems evaluate and reward what salespeople bring to the job in terms of their behavior. Sales managers measure what salespeople actually do—their efforts, activities, hours, expenses and so on. In that sense, sales managers are the driving force in sales organizations. As focus of such control system is monitoring, sales organizations rely on numerous performance criteria. The major part of compensation is fixed pay, and the variable component is tied to the attitudes, behaviors and competencies that management desires. Much of the motivation of salespeople rests more on intrinsic rewards such as feelings of achievement, personal growth and the satisfaction of offering good service and less extrinsic motivation.

Under outcome-based control system, there is a very limited extent of sales managers’ monitoring, directing, evaluating and rewarding activities, as focus of such system is to measure outcomes of sales and then reward results. These results can take many forms: sales, margins, contributions to profit, share of customer wallet, market share, sales of new products, repeat business, on-time collection of receivables and so forth. Outcome-based control does not allow the sales organization to reward specific selling efforts of strategic importance.

Hence, it is difficult for the sales organizations to direct selling efforts toward other strategic goals, such as selling to selected customer groups or pursuing customer relationship building activities that do not translate in an immediate sale. Such performance systems typically tie salespeople’s compensation closely to two or three key metrics, and a substantial part of compensation is variable pay and is determined by sales volume and margin. The salesperson in an outcome-based system enjoys considerable autonomy and hence the salesperson is the driving force in the sales organization. The sales organization sees salespeople as entrepreneurs who craft and execute their own strategies to find customers and fulfill sales targets. Salespeople are more inclined to achieve sales targets than on pleasing their sales organization with behavior expectations. Hence, depending on behavior-based or outcome-based control system, sales manager or salesperson will be key drivers (Figure 2).

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Figure 2.

Salesforce control and performance measures.

A behavior-based control system has higher fixed costs compared with an outcome-based control. Hence, it also has higher degree of operating leverage (DOL) compared with outcome control system. The DOL is a function of organization’s cost structure and is usually defined in terms of the relationship between fixed costs and total costs. DOL is related with fixed cost and also affects the breakeven point (BEP) or no loss/no profit situation. An organization that has high operating leverage (high fixed costs relative to total costs) will also have higher variability in EBIT (earnings before interest and taxes) than a similar organization with low operating leverage. ²⁰

A higher proportion of fixed pay in compensation structure is preferred for the system that puts the sales manager first (behavior-based control systems) while a higher proportion of variable pay is preferred for the system that puts the salesperson first (outcome-based control systems). Hence, firms with behavior-based system have higher operating leverage compared with similar firms with outcome-based control system (Figure 2).

Mix of Behavior-Based and Outcome-Based Control: An Optimal Solution

Sales organizations that rely on outcome-based control systems focus on getting salespeople to deliver results and are essentially indifferent to how those results are obtained. In contrast, sales organizations that rely on behavior-based control systems value how people make sales more than the number of sales they make. The behavior-based and outcome-based control systems are at the extremes, and many sales organizations function quite well somewhere in the middle, where the power of the salesperson and the power of the sales manager are in some sort of balance. In fact, this is where most sales organizations should be.

Few sales organizations should be turning over wholesale control to just salesperson or just the sales manager. Hence, few sales organizations are likely to operate a salesforce control system that is completely behavior or outcome based. However, most sales organizations emphasize one or the other as trying to implement both the system at the same time does not work well. The behavior-based control and outcome-based control may work together to achieve favorable behavior of sales employee (Figure 3).

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Figure 3.

Mix of behavior-based control and outcome-based control

Illustration

To illustrate, impact of various types of salesforce control system on compensation structure of salespeople, operating leverage and break-even point (BEP) of sales organization, assume that firm “behavior-based control” (BBC) competes with “outcome-based control”(OBC) firm as shown in Table 3. Firm OBC employs salespersons on higher proportion of commission (variable pay) in compensation structure (at 15% commission on sales), while firm BBC offers salespersons 8% commission on sales with higher threshold sales. Although both firms, that is, BBC and OBC, have identical sales volume of 65,000 units, OBC firm has a low BEP, lower degree of operating leverage and its profits vary less with changes in sales volume.

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Table 3.

Behavior-Based Control Versus Outcome-Based Control: An Illustration.

Sr. No.	Calculation	Firm BBC	Firm OBC
(1)	Sales quota (units)	65,000	65,000
(2)	Selling price/unit ($)	8	8
(3)	Sales revenue = (1) × (2) ($)	520,000	520,000
(4)	Threshold sales (units)	36,875	30,000
(5)	Unit variable cost ($)	4	4
(6)	Commission rate (%)	8	15
(7)	Variable pay = ((1) − (4)) × (2) × (6) ($)	18,000	42,000
(8)	Fixed pay ($)	42,000	18,000
(9)	Total pay = (7) + (8) ($)	60,000	60,000
(10)	Variable pay/unit = (7)/(1) ($)	0.28	0.65
(11)	Total variable cost/unit = (5) + (10) ($)	4.28	4.65
(12)	Unit contribution margin = (2) − (11) ($)	3.72	3.35
(13)	Contribution margin = (1) × (12) ($)	242,000	218,000
(14)	Fixed cost (including monitoring cost) ($)	115,000	65,000
(15)	Total fixed cost = (8) + (14) ($)	157,000	83,000
(16)	Total variable cost = (1) × (11) ($)	278,000	302,000
(17)	Total cost = (15) + (16) ($)	435,000	385,000
(18)	EBIT = (3) − (17) ($)	85,000	135,000
(19)	Breakeven point (BEP) (units) = (15)/(12)	42,169	24,748
(20)	Operating leverage = (13)/(18)	2.85	1.61
(21)	Decline in EBIT on 20% decrease in sales = 20 × (20) (%)	56.94	32.30
(22)	Fixed pay/total pay = (8)/(9) (%)	70	30
(23)	Variable pay/total pay = (7)/(9) (%)	30	70
(24)	Compensation structure (dominated by)	Fixed pay	Variable pay
(25)	Salesforce control system	Behavior control	Outcome control

Source. Calculated by the author.

Table 3 shows calculation for operating leverage and BEP for both firms. It is evident from the calculation that firm BBC has higher proportion of fixed pay in compensation structure while firm outcome-based control has higher proportion of variable pay in compensation structure. It is because behavior control is oriented toward higher proportion of fixed pay in compensation structure while outcome control is oriented toward higher proportion of variable pay in compensation structure.

Conclusion

The salesforce control system significantly influences salesforce behavior and activities and has significant effects on a salesperson’s performance, the sales organization effectiveness and compensation system used by the sales organizations. Sales compensation programs are tied to sales employee’s performance, which can be measured in two dimensions: sales behaviors (inputs) and sales outcomes (outputs). Behavior measures attempt to control the process of selling as opposed to just the outcomes.

Behavior control system requires a large number of sales managers who, in turn, need a sensitive, thorough information system that tracks salespeople, their territories and their competition; hence, such a system is expensive because of higher monitoring cost. Incentives encouraged by the outcome control system focus on achieving short-term business goals that are at odds with the need for salespeople to learn and grow so they can be successful in the long term. Sales tasks that require creativity, analytical and problem-solving skills, incentives offered by outcome control system are likely to distract salespeople and introduce stresses that detract from their ability to perform effectively. Evidently, the behavior and outcome control systems are at extremes, and many sales organizations function quite well somewhere in the middle, where the reliance of sales organization on the sales manager as well as the salespeople is in some sort of balance.