A June 2013 Journal of Marketing Research article highlights research showing that a continuous payout curve is superior to a single lump sum payment bonus plan over time. While this finding may be intuitive, nonetheless it’s worthwhile to dig into the findings and the magnitude of the difference in performance across an entire sales organization.
Let’s start with definitions. A single lump sum payment bonus plan simply means that if a rep hits her quota, she receives a single lump sum payment. If she falls short of her quota, she receives nothing. If she exceeds her quota, she doesn’t receive anything additional. It’s an all-or-nothing payout at quota.
A continuous plan pays the exact same amount for hitting quota (at least in this study) but begins paying at some level below quota (at a lower payout level), and then pays increasingly more at every incremental level up to quota. In addition, it continues the incremental payout above quota.
While a large lump sum bonus may drive those who are close to achieving their quota to hit it in the current period, the study finds that over time, across an entire sales organization, sales performance under a continuous plan outperforms sales performance under a lump sum payment bonus by 24%. Some of the biggest gains come from the lowest performers, which is not surprising given that they are likely out of reach of their quota and would give up under the lump sum bonus program. Under a continuous payment plan that starts below quota, they are more likely to be in the money.
Another finding from the study is that “timing games” are more pronounced under the lump sum bonus. Not surprisingly, if a salesperson is within reach of his quota and payout in a period, he will do whatever it takes to reach the quota, including “pulling forward” sales that may have naturally occurred in the subsequent period. Similarly, if he is well below quota and has no shot at achieving it in the current period, the lump sum bonus makes it more likely that he will “coast” for the remainder of the period and even “push sales” to the following period.
This study proves that over time, a continuous payment that gets a higher percentage of the sales force engaged in the plan will have a significant impact on revenue. While that plan is likely more costly than a lump sum plan, the incremental revenue generated should more than pay for it. Moreover, the continuous payment plan gets salespeople focused on maximizing current period revenues and earnings, and avoids timing games played by salespeople to maximize their earnings over time. This is good for the company, and good for the sales force.