Sales Bonuses Are Supposed to Motivate, So Don’t Waste Them on Easy Targets

Companies pay salespeople commissions and bonuses to increase motivation. But these formulas often fail to recognize a vital fact: Many sales results from factors that have little to do with salespeople’s effort. (For example, companies may buy because of long-term contracts or to avoid switching costs.) These are called “free sales,” and when companies pay commissions and bonuses on them, they distort the targeted pay mix and can result in less motivated salespeople. Companies can address this problem by adjusting incentive payout formulas. One strategy is to set a payout threshold so no incentives get paid until a certain sales level or percentage of quota is achieved. Another strategy is to accelerate the commission rate for increasing levels of sales or for sales above quota.