Does performance-based compensation work?

# 44 September 2015

Having part of your salary based on performance is very common in sales organisations. A study, Sahlgren & Skog conducted in 2008, found that 80% of Swedish sales forces had performance based compensation. Whether performance based compensation has a positive effect on the business, however, is up for discussion in many companies. The issue is complex, and can be approached from a number of perspectives. Does performance based salary contribute to increased sales or is it counterproductive? Is it a positive motivation factor or will it lead to anxiety and short-term focus on the individual pay check rather than the customer?

Contrasting with countries such as the USA and UK, the issue is more frequently discussed and less taken for granted in the Nordic countries. Our assessment is that the number of sales organisations with performance-based salaries is increasing. We are also noticing that owners from countries with a stronger tradition of performance-based compensation are increasing the pressure to implement this in the Nordic subsidiaries.

If the experience in some countries strongly supports the idea of performance-based salaries, and the resistance of them is equally strong in other cultures, what does research say? Is there evidence for one side or the other?

Social scientists have held that money is a questionable motivator for adequately compensated people faced with challenging tasks in their professions. The TED-clip reached a large audience and intelligently expands the discussion on performance based compensation.

Our view
Our view is that a well-designed, result based compensation program will increase motivation and results, providing that basic structures and processes for the sales organisation are in place. The success of a variable compensation programs is highly dependent on:
– fairness in opportunities between sales districts
– attainable (but still challenging) targets
– good coaching by 1st level sales leaders
– consistent and meaningful follow-up on results

On the other hand: If these factors are not in place, a performance-based program stands the risk of being demotivating. It will then be perceived as unjust and will create unnecessary internal conflict and debate in the organisation

There are motivators other than money! This seems obvious but needs emphasizing when discussing this topic. We mentioned a few factors above, but also a positive climate, the management style and other soft factors are important. Consistent use of sales competitions and how you recognise and visualise performance, could just as well give you the desired effect – to a much lower cost than performance based salary.