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In his 2015 book Misbehaving, Nobel Prize-winning economist Richard Thaler addresses the concept of loss aversion and its impact on decision making. “Roughly speaking,” he asserts, “losing something makes you twice as miserable as gaining the same thing makes you happy.” For this reason, given the choice, people tend to put more energy into reducing losses than actively pursuing gains. In a sense, he says, “Loss aversion operates as a kind of cognitive nudge,” the inversion of no pain, no gain.

Humans Aren’t Rational

A professor at the University of Chicago Booth School of Business, Thaler won the Nobel Prize in Economic Sciences for his groundbreaking work in behavioral economics. Among his greatest contributions: challenging the notion that we are always rational beings and pioneering the idea that often we act in ways inconsistent with economic theory. In the spirit of transparency, I am also an alumnus of the Booth School.

So, why does loss aversion matter to salesforce compensation?

Consider a recent story in The Wall Street Journal reporting on a new compensation plan for Bank of America’s Merrill Lynch unit. Critics of the plan argue instead of rewarding brokerages for growth, the plan punishes them if sales targets aren’t meant.

The plan emphasizes cross-selling of Bank of America’s retail-bank products, rewarding brokers with more new clients and referrals to other parts of the bank. So, while revenue growth still matters, asset and liability growth matters more for broker compensation.

If minimum sales targets are not met, the average broker generating $1 million in revenue could lose up to $10,000 from their monthly paycheck, a 2% drop in pay. Conversely, brokers meeting the new targets will receive an increase in pay.

Bank of America executives say the new compensation plan is designed to boost shareholder value and retain Merrill Lynch’s top performers for the long term.

Carrot or stick: What works best?

The Merrill Lynch example illustrates an important issue every VP of Sales confronts: what works better to motivate more sales people to equal or exceed their assigned sales quota? Do penalties or rewards spur the most asset growth? How do companies move the performance distribution of salespeople to the right of the status quo?

The loss aversion principle offers food for thought. Let’s say, for example, that the salesforce incentive plan has four components. One of them is product mix with a weighting of 25% and an on-target payout of $X. The salesperson is paid the $X upfront when the year’s plan is communicated. At the end of the year, if the product mix quota was not achieved at 100%, then the $X would be clawed back.

Under this scenario, there will certainly be individual winners and losers after a major change in compensation structure like the one Merrill Lynch has made. That’s why a good deal of time and attention should be paid to developing and communicating any new sales compensation plan.

Sum and substance

Are you considering changes or new incentives for your salesforce compensation plan? Often change is advisable when a new corporate strategy is being implemented or to attract and retain the right kinds of sales people. Experimentation and adjustments that align with changing market forces is beneficial.

If you would like to discuss this topic or your other salesforce compensation needs further, please contact Tim Weizer at tim@salescne.com or 312-479-6411 or Neil at nlappley@lappley.com. Also, feel free to share this article with anyone who might be interested.

“Don’t sell me products. Instead, lead me to 
solutions that incorporate your products.”
(Vice President of a strategic account)

In this issue of the Salesforce Alert newsletter, my colleague, Tim Weizer, shares a case study regarding a strategic change that helped achieve effective salesforce results.

The senior sales executive of a middle-market financial services company was puzzled. Key accounts of the firm had often said they were satisfied with the company. Yet the company failed to achieve one of its major objectives: getting deeper penetration of those accounts with a new marketing strategy emphasizing new products.

Individual interviews were conducted with selected key accounts at the vice president level. The answer to the puzzle was expressed clearly by one strategic account. “I want your salesperson to know me, my business, and how your products can provide solutions to my problems,” he said. Strategic accounts now demand this value proposition from their major suppliers.

Here are the five steps the company employed to address the situation.

Step 1. Know where you stand before you embark on addressing this situation. The company had interviews conducted with customers and executives at both the vice president and operational levels to get a clear and factual understanding of:

  • The account’s business as the account sees it.
  • Their business goals.
  • Their problems.
  • How the company is viewed as either a problem solver or a product pusher.
  • How the account’s life would be different if the company no longer existed.

Step 2. Get commitment from the company’s executives that major change in the company is acceptable within the company’s risk-averse culture. Armed with the above strategic account input, the sales executive developed an initial estimate of what additional sales and profitability could be expected from addressing this value proposition. He then got management’s agreement to be open to change the process of how it sells to strategic accounts.

It was clear that without this upfront commitment, no significant change would occur. Without commitment, he knew it would be futile to proceed with any further analysis and financial estimates.

Step 3. Rethink the entire strategic account selling process. This step meant doing a thorough analysis of:

  • The steps involved in the traditional selling process.
  • The time spent with the account’s VP and different operational executives.
  • How well the sales skills/abilities/competencies matched up with the account’s needs.
  • How well the sales organization was managed and rewarded for both existing and new products’ results.

An online salesforce effectiveness survey was included in this step to get the field’s input on a number of topics key to their work with strategic accounts.

The company then developed two options: (1) start a new sales group focused on the strategic accounts’ VP level and add a technical specialist to address questions on the spot, or (2) upgrade the existing senior sales representatives with current new product, technical, and solution selling training. A second and more detailed estimate of additional sales and profitability of each option was prepared.

Step 4. Present each option and a recommendation to the senior management group. Include an implementation plan for the recommended option. The sales executive recommended the formation of a new sales position focused on the VP level along with the formation of the technical specialist position.

In addition, small, cross-functional teams were developed to fully address the value proposition expressed by the strategic account, namely “don’t push product…lead me and my people to an answer.”

HR working with the VP Sales developed a team-based compensation plan for this new structure. Particular attention was given to ensure that the new plan did not create unproductive conflict or misaligned objectives between jobs.

Step 5. Get Started. Begin showing the strategic accounts that you are addressing their value proposition. The sales executive began with a pilot of the new sales position, the technical specialist, and a small cross-functional team. The sales executive also conducted two solid months of training for the team that would be supporting and visiting the strategic accounts.

Results have been better than expected. New products sales to the strategic accounts in the pilot group are up and the teams are working well as a unit.

Contact Us
If you would like to discuss this case study or address any questions, please contact Tim at tim@salescne.com or simply reply back to this email to reach Neil.