PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES

- Financial incentives  financial rewards paid to workers whose production exceeds

some predetermined standard.
- Productivity  the ration of outputs (goods and services) divided by the inputs
(resources such as labour and capital).
- Scientific management movement, which emphasized improving work through
observation and analysis.
- Pay-for-performance  Any plan that ties pay to some measure of performance, such
as productivity or profitability.
- Variable Pay  Any plan that ties pay to productivity or profitability, usually as one-
time lump payments.
A. Motivation and Incentives

Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it
provides the challenge and recognition we all need to help satisfy “higher-level” needs for things like
accomplishment and recognition. Hygiene factors (factors outside the job itself, such as working
conditions, salary, and incentive pay) are inadequate, employees become dissatisfied. Motivator
factors focus on intrinsic aspects of the job, such as challenge and recognition. Herzberg argues that
solely relying on external motivators like financial incentives is insufficient for long-term motivation;
instead, managers should enrich job content to fulfil higher-level needs and create intrinsic
motivation.

B. Demotivators and Edward Deci

Highlight another potential downside to relying too heavily on extrinsic rewards. Be cautious in
devising incentive pay for highly motivated employees, lest you inadvertently demean and detract
from the desire they must do the job out of a sense of responsibility.

C. Expectancy Theory and Victor Vroom

Expectancy motivation to exert some level of effort depends on three things:

- Expectancy (in term of probability)  A person’s expectation that his or her effort will
lead to performance.
- Instrumentality  The perceived relationship between successful performance and
obtaining the reward.
- Valance  The perceived value a person attaches to the rewards.
D. Behaviour Modification/Reinforcement and B.D. Skinner

Behaviour modification means changing behaviour through rewards or punishment that are
contingent on performance. Have two main principles:

- Appears to lead to a positive consequence (reward) tends to be repeated, whereas

behaviour that appears to lead to a negative consequence (punishment) tends not to
be repeated.
- That managers can therefore get someone to change his or her behaviour by providing
the properly scheduled rewards (or punishment).
E. Individual Employee Incentive and Recognition Programs
1. Piecework

A system of pay based on the number of items processed by each individual workers
in a unit of time, such as items per hour or items per day. Straight piecework means an
incentive plan in which a person is paid a sum for each item he or she makes or sells, with a
strict proportionally between results and rewards. The standard hour plan, a plan by which a
worker is paid a basic hourly rate but is paid an extra percentage of his or her rate for
production exceeding the standard per hour or per day.

- Advantage  Simple to calculate and easily understood by employees, appear

equitable in principle, and their incentive value can be powerful since they tie pay
directly to performance.

- Disadvantage  Unsavoury reputation, A more subtle drawback, engender rigidity,

employees may similarly focus less on quality, resist switching jobs, and equipment
maintenance may suffer as employees push to hit quotas.

2. Merit Pay as An Incentive

Any salary increase awarded to an employee based on his or her individual

performance. If a merit pays plan falters, improving appraisal procedures and differentiating
rewards among employees can enhance effectiveness.

- Awards merit raises in a lump sum once a year (making them, in effect, short-term
bonuses for lower-level workers).
- Awards to both individual and organizational performance.
F. Incentives For Professional Employees

Professional employees are those whose work involves the application of learned knowledge to
the solution of the employer’s problems, such as lawyers and engineers. Dual-career ladders are
another way to manage professional’s pay. At many employers, higher pay requires rerouting from,
say, engineering into management.

G. Nonfinancial and Recognition-Based Awards

The term recognition program usually refers to formal programs, such as employee-of-the-moth
programs. Social recognition programs generally refer to informal manager-employee exchanges
such as praise, approval, or expressions of appreciation for a job well done. Performance feedback
means providing quantitative or qualitative information on task performance to change or maintain
performance; showing workers a graph of how their performance is trending is an example.

H. Incentives For Salespeople

1. Salary Plan
Focus on salary, commissions, or some combination of the two. Straight salary makes sense
when the main aim is prospecting (finding new clients) or account servicing, also makes it
easier to switch salespersons’ territories.
 2. Commission Plan
Tend to attract high-performing salespeople because they see that effort produces rewards.
Alternatives include straight commissions, quota bonuses (for meeting particular quotas),
management by objective programs (pay is based on specific metrics), and ranking programs
(which reward high achievers but pay little or no bonuses to the lowest-performing
salespeople).
3. Combination Plan
The combination varies by industry and by what the company hopes to achieve, but a split of
about 60% - 70% base salary and 40% - 30% incentive seems typical. Tend to be complicated,
so misunderstanding can ensue. This isn’t a problem with a simple salary-plus-commission
plan, but most plans aren’t so simple.
4. Maximizing Sales Results
In sales, effective motivation through quotas and commissions is crucial. Informal
commission rate setting can hinder success. Key questions for effective quotas include timely
communication, transparency on quota setting, and a balance of bottom-up and top-down
considerations. To gauge effectiveness, aim for 75% meeting or exceeding quotas, 10%
achieving higher performance, and 5-10% needing coaching. Consider the impact of sales
carryover and differentiate among star, laggard, and core performers. Be cautious about
limiting commissions, as it may deter top performers. Use multitier targets for various
performance levels and consider acceleration in commission rates for achieving targets. Track
the cost of sales to evaluate efficiency.
5. Sales Incentives in Action
Encourages the salesperson to hold firm on the retail price, and to push “after-sale products”
like floor mats and side mouldings. There may also be extra incentives to sell packages such
as rustproofing.
I. Incentives For Managers and Executives

Most firms have annual bonus plans aimed at motivating managers’ short-term performance.
The actual award often depends on some combination of individual performance and organizational
performance, so that for instance, high-performing managers get a bonus even if the company itself
underperforms. Long-term incentives include stock options, “golden parachute”, and stock
appreciation rights.

J. Team And Organization-Wide Incentive Plans Are More Important

With team incentives, the main question is whether to reward members based on individual or team
performance; both have pros and cons. Organization-wide incentive plans are plans in which all or
most employees can participate. These include profit-sharing plans in which employees share in the
company’s profit; gainsharing plans, including the Scanlon plan, engage employees in a common
effort to achieve productivity objectives and thereby shar the gains. With employee stock ownership
plans the employers contributes shares of its own stock to a trust established to purchase shares of
the firm’s stock for employees.

K. Employee Management

A goal of your compensation plan; appraise and incentivize supervisors partly based on their
effectiveness in improving their subordinates’ engagement; and if possible enable employees to
participate in devising the compensation plan.
 STUDY CASE: The HubSpot.com Sales Incentive Plan

Two graduates of MIT’s Sloan School of Management founded HubSpot.com about 12 years
ago.126 HubSpot provides special customer relationship management (and other) software and
systems aimed at helping clients use online content to attract potential customers to their Web sites,
something known as “inbound” marketing.

When the founders started HubSpot, their sales challenge was straightforward. At that point, the
company only had about 100 customers, so they had to acquire as many customers as they could, as
quickly as possible. Therefore, they focused their first sales compensation plan on what that plan’s
architect refers to as “hunting” for new customers. That first plan gave HubSpot salespeople a base
salary, plus $2 dollars up front for every $1 of monthly recurring revenue they brought in from
clients. Knowing that some clients might well leave, the sales compensation plan included a four-
month claw back clause. In other words, if a client left for any reason within the first four months,
HubSpot took back that entire commission from the salesperson. It was a straightforward sales
compensation plan, and in less than six months HubSpot zoomed from 100 to 1000 customers, and
its revenues jumped from $300,000 to $3 million. So far so good.

However, a problem soon became apparent. HubSpot had a big client retention problem. Way
too many clients were dropping the service (mostly after four months). HubSpot’s usual procedure
was to assign each new client to a post-sale consultant. That consultant was responsible for setting
up the new client’s service and training its staff in how to use HubSpot software and services.
Management first assumed that some post sale consultants were doing something to turn their
clients off, and that that accounted for the client churn. But after analysing client retention rates, it
was apparent that the post-sale consultants were not the problem: client churn for all post sale
consultants was about the same.

Management therefore turned to analysing client churn among salespeople, and there they
found the problem. Some salespeople had more than 10 times the client churn than others! For
some reason, some salespeople’s clients remained long-term customers, while others left in droves.
Some salespeople were doing a better job than others, in terms of the types of customers they
focused on and what they told their clients HubSpot could accomplish for them. Management
believed that modifying the sales compensation plan was the way to solve the problem. The question
was, what exactly should the new sales compensation plan look like?

Questions

12-14. How exactly would you change the HubSpot sales compensation plan to solve this client
retention problem? Please be specific about what your new plan would consist of.

Answer:

To tackle HubSpot's client retention issue, I suggest adjusting the sales compensation plan. This
involves maintaining a base salary but reducing upfront commissions for new customers.
Additionally, implementing a tiered commission structure based on client tenure, offering higher
percentages for longer subscriptions, and introducing performance-based bonuses tied to client
satisfaction and retention rates. This approach aims to incentivize salespeople to prioritize long-term
client success.
 12-15. Management defined the client churn problem as a sales problem, to be solved with a
modified sales compensation plan. What else could have caused the client churn problem, and how
would you have solved that?

Answer:

While initially seen as a sales-related issue, the client churn problem at HubSpot may stem from
factors beyond the sales team. Potential causes and solutions include:

- Product or Service Issues: Assess and address dissatisfaction stemming from product or
service-related problems. Use client feedback to enhance features and improve overall
satisfaction.
- Onboarding and Training: Review post-sale onboarding and training processes to ensure
clients fully understand and utilize HubSpot software. Consider ongoing training sessions for
improved client proficiency.
- Customer Support: Strengthen customer support services for prompt issue resolution.
Implement a robust support system to assist clients throughout their subscription, reducing
dissatisfaction and potential churn.
- Communication and Expectations: Improve communication between salespeople and clients.
Ensure sales representatives set realistic expectations regarding what HubSpot can achieve,
aligning client expectations with software capabilities.
- Client Segmentation: Analyse client churn patterns and adjust sales strategies based on client
segments. Tailor approaches to address the unique needs and expectations of different client
groups.