You can’t always get what you want: The snarky nature of incentives…

Back in mid-December, Bijan Sabet had a short post about channel conflict.   When you’re selling any kind of product, you sell it through a channel e.g. direct sales (your own sales people/website selling directly to customers), reseller sales, distributor sales or perhaps some combination of all three.

Conflict arises when you put two or more channels in direct competition with each other, usually while providing an unfair advantage to one of the channels involved.  A typical example would be conflict between in-house sales people and resellers.  If the customer can get a lower price from an in-house sales guy (or gal) than from a reseller, you’ll have a conflict.  The reseller will lose sales and eventually drop your product.

Much of the conflict revolves around pricing, and big product manufacturers go to great lengths to try and keep pricing consistent across all the channels that they use.  You may have noticed that there is almost NO variation in price on new Apple products regardless of where you buy them.  And that’s because Apple exercises very strict control over it’s pricing (for legal reasons, they can’t exactly force everyone to sell at a certain price, but they can make it awfully unattractive NOT to sell at a certain price.).

One of the things that people often forget about when they are considering channel conflict (or when they are trying to repair its aftermath) is how the sales team are compensated.

Sales people usually make a base salary plus a commission.  The commission structure can range from simple (x% of all sales) to somewhat complex (x% for direct sales, y% for sales through resellers, z% for distributor sales) to mind-numbingly tedious and complex with a range of percentages driven by monthly and quarterly sales targets with escalators based on breaking through certain sales volumes.

The key thing to remember is that you ALWAYS get the behavior you incentivize for.  I once worked for a company who’s sales team sold direct and also worked with resellers.  The company was keen to increase direct sales and did so by raising the rate of commission on those sales.  i.e. a sales person would make more selling a product direct than selling it to a reseller.

Now a typical reseller discount on a product was 30-35%.  i.e. a $1000 product would be sold to a reseller for $650-700.  But direct sales were, in theory, at full price.  In other words, the company would make a lot more money on a direct sale and could afford to be quite generous with the commission rate.

But, as often happens, someone outside the sales team pointed out that this new commission rate would amount to a lot of money (ignoring the fact that the company would be making a lot more money on each sale).  This lead to the brilliant notion that there should be a minimum sales volume that the sales person would have to reach in order to get this crazy new rate of commission.

The new sales plan was rolled out.  Reseller sales jumped.  Direct sales actually fell.  Why?  Because the sales guys knew that if they didn’t hit the minimum quota, they wouldn’t get any commission for their direct sales.  So they stockpiled them until the end of the month.  If they hadn’t generated enough direct sales to get a commission, they rolled all of them through their favorite channel partner.  So they still got a commission, and the company lost 30-35% on each sale.

Incentives are equally tricky outside the realm of sales.  In one of my earliest jobs, I was working as a contract employee for a large company.  Three of us joined at the same time.  Two of us (including me) worked our butts off, while the third was, to be polite, incredibly lazy.  When a permanent position became available, all three of us applied for it.  Captain Lazy was given the job.  Come to find out that the department Manager’s bonus was tied to employee turnover.  Promotions were treated the same as someone leaving from a bonus-accounting point of view, so the Manager in question wanted a dullard that would stay in the same job for a long period of time, whereas I (and the other guy) would have wanted to progress to more senior positions as soon as they became available.  So the net result of a good idea — trying to build a solid team — was to build an environment that rewarded laziness and weeded out competence.

In case you might think that this is a recent phenomenon only found in the business world, I was entertained to read (in that book) that an archaeologist named Koenigswald ran into the same problem on a dig in 1931.  They were excavating a significant trove of early hominid fossils (Ngandong Homo Erectus, if you care) and Koenigswald came up with the bright idea of offering a cash reward for each piece of fossilized bone turned in by local villagers.  It was only after the dig that he found that several villagers had smashed large, intact bones, so as to produce more bone fragments and get a larger reward.

Oops.

So the moral of the story is: compensation is always tricky.  Proceed with caution and keep your spidey-sense focused on finding the unexpected side-effects of whatever you’ve come up with…