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Variable Compensation and Salesperson Health

Variable Compensation and Salesperson Health

Johannes Habel, Sascha Alavi and Kim Linsenmayer

The U.S. is among the ten most stressed nations in the world. One profession particularly affected by stress is sales. A new Journal of Marketing study reveals that one reason for such stress is the compensation plan under which salespeople operate.

Sales compensation plans typically comprise a variable component. Variable compensation is issued on top of a base salary and the amount is contingent on performance. For example, a salesperson with an annual target salary of $100,000 and a variable compensation share of 80% would receive $20,000 as a fixed amount with the remaining $80,000 contingent on the achievement of predetermined sales targets. Variable compensation is widely used and accounts for approximately 40% of total sales compensation in the United States—equivalent to more than $320 billion. However, variable compensation can conjure substantial compensation uncertainty for salespeople.

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Variable compensation has been frequently shown to motivate salespeople to work harder and thus achieve higher performance. However, in our study we show that variable compensation also induces performance pressure, which causes stress, burnout, and sickness. These “hidden costs” of variable compensation directly counter the hoped-for positive effects on performance.

We conducted four studies in this respect. In our first study, we examined a business that reduced the variable share in salespeople’s compensation plan from 80% to 20%. After reducing the share, salespeople’s sales performance decreased, but interestingly, the number of days salespeople fell sick also decreased, by approximately 30%. Thus, when receiving a higher fixed salary, salespeople worked less hard, but gained health in return.

In our second and third studies, we surveyed salespeople from various companies and industries to better understand the relationship between variable compensation, performance, and health. We found that variable compensation shares lead salespeople to experience increasing stress and burnout, particularly if these shares are relatively high (> 30%). However, these experiences strongly depend on the individual salesperson’s ability and social resources. First, high ability reduces the uncertainty regarding which compensation the salesperson achieves. Second, salespeople who have social resources in the form of a good relationship with their leaders and teams can cope better with the pressure from variable compensation. Thus, these salespeople experience less stress and burnout (by approximately 15%). 

In our fourth study, we examined how managers make decisions about sales team’s variable compensation. The study reveals that managers choose lower variable compensation shares if they were made aware of the stress induced by their decisions. These managers were particularly likely to choose lower variable compensation shares if they were empathic. Empathy seems to allow managers to understand and appreciate the hidden costs associated with high levels of stress, such as low staff morale, high absenteeism, and turnover. 

Based on our findings, we recommend that companies that incentivize their sales teams through variable compensation shares strive to mitigate the potential health problems those incentives create.
First, if a company’s variable compensation share is high, managers should carefully screen salespeople and sales supervisors before hiring them. Specifically, when hiring salespeople, managers should determine their ability and social resources that will enable them to cope with the stress from variable compensation plans. For example, while interviewing salespeople and reviewing references, managers might probe the stability of their past performance, their experience, and their tendency to build relationships with leaders and peers. If these resources are lacking or unobservable (e.g., for first-time employees), managers might screen for other stress-related resources, such as strong personal resilience or social networks. When hiring sales supervisors, managers also should screen for these applicants’ ability to help salespeople cope with stress and the ability to build strong relationships with and among team members.

Second, managers should help salespeople build their job-related resources. For example, by encouraging salespeople to manage their sales pipeline in a way that secures a steady stream of sales, managers can help them reduce compensation uncertainty and thus stress. Regarding social resources, companies should train supervisors to adopt leadership techniques related to relationship and community building. Relatedly, companies could encourage supportive networks among salespeople, such as through team-building events.

Third, if legally and culturally possible, managers could personalize incentive schemes. They could assign a high variable compensation share to salespeople with high ability and social resources, but limit the variable compensation share for more stress-vulnerable salespeople.

Fourth, companies concerned with their salespeople’s stress and health should sensitize their managers to the health-harming effects of their compensation decisions. Raising awareness of these effects may encourage managers to design more sustainable compensation plans. In this sense, our study may help companies and managers set variable compensation shares that effectively balance economic interests with employees’ health. 

Read the full article.

From: Johannes Habel, Sascha Alavi, and Kim Linsenmayer, “Variable Compensation and Salesperson Health,” Journal of Marketing.

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Johannes Habel is Associate Professor of Marketing, C.T. Bauer College of Business, University of Houston, United States.

Sascha Alavi is Professor of Sales Management and Chair of the Sales Management Department, University of Bochum, Germany.

Kim Linsenmayer is a Research Associate, University of Bochum, Germany.