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Managing Salesforce Performance: Behavior Versus Outcome Measures

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DOI: 10.1177/0886368715581959

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Article
Compensation & Benefits Review

Managing Salesforce Performance:

2015, Vol. 47(2) 81­–90
© 2015 SAGE Publications
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DOI: 10.1177/0886368715581959
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Pankaj M. Madhani, Professor, ICFAI Business School, Ahmedabad, India

Abstract
Effective management and motivation of salesforce is crucial to the success of sales organization as it ensures proper
salesforce focus on market needs and successful achievement of organization goals. Sales organizations have two
main approaches for managing the behavior of their salesforce, namely, behavior-based (monitoring) and outcome-
based (incentives). A behavior system evaluates the salesforce in light of the selling process, while an outcome system
evaluates the salesforce in light of results. This research identifies key characteristics of behavior- and outcome-based
systems along with its benefits and drawbacks and suggests selection criteria for appropriate choice of behavior versus
outcome measures. The study explains agency theory and highlights the underlying logic of short-term behavior of
salespeople when compensated with incentives. Research also provides performance matrices for measurement and
evaluation of financial impact of behavior and outcome control. The behavior-based and outcome-based control
systems are at the extremes, and many sales organizations function in the middle, balancing the two. Finally, the study
provides a numerical illustration to design an optimal performance measurement scenario based on behavior- and
outcome-based measures.

Keywords
behavior control, outcome control, agency theory, fixed pay, variable pay

Introduction individuals who comprise the sales workforce by speci-

Salespeople are often the most direct link between an
organization and its customers. Compensating sales-
people is different from compensating other employ-
ees (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 unique-
ness 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 real-
izing their full potential. An important aspect of super-
vision of sales employee is the creation of a motivating
environment.
Effective management and motivation of a sales-
force 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
fying 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 communi-
cate 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 sales-
force focus on market needs and successful achieve-
ment of sales organization goals.
Salesforce Control System: Key
Concepts
The salesforce control system, as an antecedent of com-
pensation, can be defined as a set of policies, rules and
Corresponding Author:
Pankaj M. Madhani, ICFAI Business School (IBS), IBS House, Opp.
AUDA Lake, Near Science City, Off. SG Road, Ahmedabad 380060,
India.
Email: pmadhani@iit.edu

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82 Compensation & Benefits Review 47(2)
procedures that the organization uses to monitor, direct,
evaluate and compensate its salespeople in the perfor-
mance 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 objec-
tives 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 informa-
tion related to sales for effective control—to support
decisions on remuneration, promotion, termination and in
sales employment disputes2—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 salespeo-
ple 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 consid-
ered 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 inter-
vention 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 reli-
ance 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 organiza-
tion is considered a principal and the sales employee is
considered an agent. Conflicts arise in the agency rela-
tionship because the principal and the agent have diver-
gent goals and risk preferences and do not always share
information (i.e., information asymmetry).6 Goal incon-
gruence 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 prin-
cipal is related directly to sales and profits, whereas util-
ity for the agent is related directly to compensation and
inversely to effort. Hence, according to agency theory,
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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. out-
comes). 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 pre-
dicts 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 organi-
zation (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 con-
tract 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 deter-
mine 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 moni-
tor 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
Madhani 83
Table 1.  Key Characteristics of Behavior- Versus Outcome-Based Control Systems.
Behavior control
1 More structured with salesperson’s behaviors 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)
3 Much direction, supervision and many managers (low span of
control)
4 Much contact with sales manager
5 Much reporting
6  Salespeople make final decisions
7  Performance evaluated subjectively on many criteria
8  Sales organization bears risk
9 Compensation strategy: fixed pay (salary) is higher proportion of
compensation structure—Keyed to customer-generated results
10  Behavior of salesperson—More ethical
Source. Tabulated by the author.
agent’s behavior, but is incapable of judging the optimal-
ity 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’ activi-
ties to enhance efficiency and make the goals of the prin-
cipal and agent congruent. Hence, the agency theoretic
approach focuses on determining that optimal compensa-
tion contract which governs the relationship between the
sales organization and its salespeople. Agency theory
examines the tradeoffs necessary to reach efficient solu-
tions 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 strate-
gies 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 con-
trol 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
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Outcome control
Low to little structure with sales performance as
performance criteria
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
Little direction, supervision and few managers (high span
of control)
Little contact with sales manager
Little reporting
Sales managers make final decisions
Performance evaluated on a few observable results
Sales employee bears risk
Compensation strategy: variable pay is higher
proportion of compensation structure—Keyed to
sales-generated results
Behavior of salesperson—Less ethical
managerial direction. Outcome control rewards salespeo-
ple 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 coopera-
tion between salespeople and are more committed to
serve the organization. They have higher levels of intrin-
sic 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 evalu-
ates 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.
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
84 Compensation & Benefits Review 47(2)
Sales force Orientation
Sales Customer
Long Term
Behavior
Control
Time Horizon
Outcome
Control
Short Term
Outcome Behavior
Performance Measure
Figure 1.  Salesforce control: Key dimensions.
Source. Matrix developed by the author.
performance of the salesperson has two key dimensions,
comprising behavior performance and outcome perfor-
mance (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.
Behavior controls emphasize sales behaviors and typi-
cally involve extensive monitoring and directing feed-
back 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 per-
formance. Hence, behavior control emphasizes long-term
orientation of salespeople while output control encour-
ages short-term orientation of salespeople (Figure 1).
The difference between short-term and long-term out-
looks 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 prob-
lem, 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
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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
Fixed Pay salespeople to adopt behaviors without having to con-
vince them of their profitability.
Compensation Structure
In contrast, an outcome system may lead to undesir-
able 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
Variable Pay 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 willing-
ness 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 ori-
entation of salespeople that is often triggered when they
are compensated with variable incentives.13 The individ-
ual 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
Madhani 85
Table 2.  Selection of Behavior Control Versus Outcome Control: Key Considerations.
Behavior-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.
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.
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.
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.
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.
Source. Tabulated by the author.
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 out-
put 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.
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Outcome-based control
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.
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.
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.
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).
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.
Key considerations for the selection of behavior-based
control versus outcome-based control are given in Table 2.
Benefits of Behavior Control
A behavior control system helps sales organizations in
developing or reinforcing a team-oriented, risk-averse
and recognition-motivated salesforce. It also removes
immediate pressure to sell, rewards long-term outlook
and heightens intrinsic motivation. A behavior control
system promotes open sales technique and customer-ori-
ented strategies. Hence, it encourages low-pressure sell-
ing styles and better customer services to ensure repeat
business, customer loyalty and favorable word of mouth.
In such a long-term service orientation environment, the
salesperson has no “hidden agenda.” Behavior control
provides incentives to salespeople to sacrifice short-term
performance indicator (such as immediate sales) and
instead focus on long-term strategic consideration (such
as serving customer needs).
In the early 1990s, IBM found that its sales representa-
tives produced high sales volume by pushing mainframes,
but many customers were alienated when they realized
that they had been sold the wrong product. Based on this
86 Compensation & Benefits Review 47(2)
experience, IBM changed its compensation policy to
incorporate relational measures of sales performance that
stress behaviors over outcomes.15
Best Buy, a consumer electronics retail chain, elimi-
nated its commissioned salesforce when a focus groups
study indicated that customers did not trust commis-
sioned salespeople. Then Best Buy adopted a straight sal-
ary plan and established “answer centers” in each store
where customers could come for help. Customers liked
the new hassle-free approach and found it more comfort-
able and convenient. The salespeople liked the change as
well because they earned a good salary regardless of sales
volume.16
Drawbacks of Behavior Control
Behavior control systems are not as closely linked to
observable financial performance, are difficult to moni-
tor, increase the managerial burden, increase subjectivity
in evaluations, can create perceptions of unfairness and
favoritism, reduce salespeople’s autonomy and may limit
salespeople’s creativity regarding the sales process. A
behavior-based control system only works when the sales
manager knows which behaviors to ask for and which
behaviors to discourage. Information technology–based
solutions, such as salesforce automation tools, help sales
managers to monitor and manage the salesperson’s activi-
ties. It also improves access to information on field sales
activities such as the salesperson’s prospect funnel and
account-specific calling patterns. However, it entails
additional costs for the sales organization. As behavior
control systems require far more overhead compared with
outcome control it is more expensive.
Benefits of Outcome Control
Outcome systems are more common in sales organiza-
tions because the behavior of salespeople is often hard or
costly to monitor directly, as salespeople usually control
their own work and often work away from the organiza-
tion. An outcome control system is often more useful
when salespeople cannot be supervised, profit margins
are similar across products and products do not differ in
the time and effort required to sell. Outcome systems are
easier to monitor, provide a more objective basis for
rewards and motivate high performers. In outcome sys-
tem, the selling process is not imposed, leaving the sales-
person free to decide which behavior is best suited for
making a sale.
Drawbacks of Outcome Control
One drawback of outcome control focus is that sales man-
agers exercise little control over non–sales behaviors of
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sales employees. Hence, it does not always reflect effort,
superior customer service or long-term relationship
building. Excessive reliance on salesforce incentives that
are tied to short-term, individual, results-focused metrics
can compromise customer perception by encouraging
salespeople to behave inappropriately to maximize their
short-term incentives.17 It encourages inappropriate
salesforce behaviors, including organizationally unpro-
ductive short-term focus among salespeople. As sales-
people are obsessed about achieving their targets, they
spend too little time developing future selling skills or
building long-term customer relationships.
Sears’ is an appropriate illustration of how incentive
systems negatively affect sales behavior. In 1992, auto-
motive service advisors of Sears were accused of over-
charging auto repair customers to earn higher
commissions. Sears paid the employees of its automotive
repair division a straight commission on the parts and ser-
vices they sold to customers and commission was tied to
sales goal.16 Automotive service salespeople found their
own way to generate sufficient business to earn commis-
sions by performing unnecessary repairs and routinely
adding contrived repairs to customers’ bills. The incen-
tive compensation inflicted great harm on the reputation,
integrity and operation of Sears. Sears had overcharged
by an average of $223 for repairs and routinely billed for
work that was not done.
The Sears incentive system fostered self-serving
behavior by encouraging salespeople to care more about
their incentives than the fair treatment of customers. That
behavior harmed both the customer and company in the
long run, and hence, Sears had modified the compensa-
tion system and abolished commissions and sales goals,
making customer satisfaction its number one priority. The
purpose was to better achieve a quality balance between
motivating salespeople to sell and motivating them to
provide high customer service.18
Staples, the large U.S. office retailer, has rewarded
salespeople for selling add-ons as part of an incentive
system called “Market Basket.” According to this incen-
tive scheme, each time a Staple employee sells a com-
puter, he must sell about $200 worth of other stuff to meet
his target. Such outcome-based policy resulted in short-
term orientation of salespeople and severely affected
Staples customer as well as company reputation.19
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
Madhani 87
driving force in sales organizations. As focus of such con-
trol system is monitoring, sales organizations rely on
numerous performance criteria. The major part of com-
pensation is fixed pay, and the variable component is tied
to the attitudes, behaviors and competencies that manage-
ment desires. Much of the motivation of salespeople rests
more on intrinsic rewards such as feelings of achieve-
ment, 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 sys-
tem is to measure outcomes of sales and then reward
results. These results can take many forms: sales, mar-
gins, 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 consider-
able 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 tar-
gets. Salespeople are more inclined to achieve sales tar-
gets 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).
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) com-
pared with outcome control system. The DOL is a func-
tion 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 variabil-
ity 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 sys-
tem that puts the salesperson first (outcome-based control
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Sales Organization’s
Driving Force
Sales Sales
Person Manager
High Fixed Pay
Compensation Structure
Behavior
Control
Operating
Leverage
Outcome
Control
Low Variable Pay
Short term Long term
Time Horizon
Figure 2.  Salesforce control and performance measures.
Source. Matrix developed by the author.
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 whole-
sale 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).
Illustration
To illustrate, impact of various types of salesforce control
system on compensation structure of salespeople, operating
88 Compensation & Benefits Review 47(2)

Optimal Salesforce Performance

Behavior Outcome
Based Based
Control Control

Sales Organization

Figure 3.  Mix of behavior-based control and outcome-based control

Source. Framework developed by the author.

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.

leverage and break-even point (BEP) of sales organization,
assume that firm “behavior-based control” (BBC) com-
petes with “outcome-based control”(OBC) firm as shown
in Table 3. Firm OBC employs salespersons on higher pro-
portion 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.
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

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Madhani 89
compensation structure while firm outcome-based con-
trol has higher proportion of variable pay in compensa-
tion 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 organi-
zation effectiveness and compensation system used by
the sales organizations. Sales compensation programs are
tied to sales employee’s performance, which can be mea-
sured 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 territo-
ries and their competition; hence, such a system is expen-
sive 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 cre-
ativity, 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 mid-
dle, where the reliance of sales organization on the sales
manager as well as the salespeople is in some sort of
balance.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with
respect to the research, authorship, and/or publication of this
article.
Funding
The author received no financial support for the research,
authorship, and/or publication of this article.
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Author Biography
Pankaj M. Madhani earned bachelor’s degrees in chemical
engineering and law, a master’s degree in business administra-
tion from Northern Illinois University, a master’s degree in
90 Compensation & Benefits Review 47(2)

computer science from Illinois Institute of Technology in
Chicago, and a PhD in strategic management from CEPT
University. He has more than 28 years of corporate and aca-
demic experience in India and the United States. During his ten-
ure in the corporate sector, he was recognized with the
Outstanding Young Managers Award. He is now working as
professor at ICFAI Business School (IBS) where he received
the Best Teacher Award from the IBS Alumni Federation. He is
also the recipient of the Best Mentor Award. He has published
various management books and more than 225 book chapters
and research articles in several refereed academic and practitio-
ner journals such as World at Work Journal and The European
Business Review. He is a frequent contributor to Compensation
& Benefits Review and has published 14 articles on sales com-
pensation. His main research interests include salesforce com-
pensation, corporate governance, and business strategy.

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