CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
Sales incentives are proven winners. It’s pretty simple, really. Pay your salespeople commissions and bonuses for the things your company wants, and business and profits go up. However, when you create a game, you can game the game. Get a monthly commission, stack your sales in one month for more money than you’d get spreading them out. Earn a referral bonus on new accounts. Well, tell clients to open one and just cancel later. No harm, no foul. These schemes can range from the innocuous to the criminal.
Today’s guests say that to spot and stop counterproductive sales incentives, company leaders need to learn to think like salespeople and even develop an “immoral imagination.” Joining me now are Timothy Gardner, Associate Professor at the Huntsman School of Business at Utah State University, and Colin Wong, a consultant in incentive compensation and sales performance management. Along with sales executive Rick Butler, they wrote the HBR article, How Salespeople Game the System. Tim, thanks for being here.
TIM GARDNER: Yeah, thank you for having me.
CURT NICKISCH: Colin, welcome to you too.
COLIN WONG: It’s great to be here.
CURT NICKISCH: Colin, you study incentives in your work as a consultant. There’s that old phrase, “What’s in it for me?” When you have bonuses, when you have commissions, that’s kind of clear, but it sounds like it’s almost natural for people to think even more so, like, how do I make this work for me even beyond what the company or organization intends?
COLIN WONG: Absolutely. Salespeople are by nature are just going to try to find the most efficient way to maximize their return on effort. So, as we talk about in the paper, some may take that to extremes that ultimately are illegal or fraudulent, but there are other cases where it’s just kind of bending the rules and may or may not have significant impact on the company.
CURT NICKISCH: Now Tim, you did mention this term, immoral imagination, in the article, which I thought was kind of catchy. Can you explain that?
TIM GARDNER: Several of the people that we interviewed in this project did not believe that salespeople engaged in this type of gaming incentive plan, that they felt like they were doing what they were paid to do, and anything that was against the rules was just an inadvertent violation.
CURT NICKISCH: I have to say, I’m surprised that they’re surprised.
TIM GARDNER: These are people in the sales field. And what really struck us is that people who have done sales before are more likely to be aware of the type of gaming tactics that are out there. Now, that doesn’t mean they themselves have gamed the system, gamed the incentive systems, but they’ve seen it and they’re aware of it.
And so I came across this term, immoral imagination, and it’s used in the world of business ethics slightly differently, but to Colin and I, what this idea of immoral imagination means is, can you look at systems, incentive systems, any type of system in existence, and anticipate how someone’s going to take advantage of it in some way and how they might misbehave?
My teasing example is that as a teenager, my wife was a very good, obedient young woman and didn’t disobey your parents, and I was a terrible young man in high school and college. Raising kids, I have a much better sense of the ways that they’re going to go off track, the way they might be misleading us and things that they aren’t doing. So I would say I have a much better immoral imagination, and I think this captures what sales incentive designers need to design a plan, to anticipate how people might take advantage of it.
CURT NICKISCH: Well, let’s go through some of the most common schemes before we talk about what to do about it. We can’t get through all of them, you kind of outlined eight archetypes or categories in your article. What are some of the most common ones?
TIM GARDNER: I think for me, the one that jumps out the most that I didn’t realize when I first started this project was this idea of partners in profit, where salespeople will sometimes actually partner with the customer to secure a deal for them, but really is going to be most beneficial for the salesperson themselves.
As an example we put in there, the idea of coaching customers to sign up for promotional deals and then coaching them on the appropriate time to cancel that deal. So, they don’t really have to pay anything out of pocket, the salesperson gets a higher commission, and the customer gets something that basically comes out as free.
CURT NICKISCH: You mentioned promotions there. That’s actually kind of an incentive that companies are putting in place for consumers or their clients. And then you have salespeople who are being incentivized to win sales or get their clients to open accounts or whatever it is. So, you kind of have two incentives that are overlapping there, and maybe because of that incentive on the consumer side and also on the salesperson side, you have sort of extra incentive to make that happen, the gravity is pulling that kind of behavior in.
TIM GARDNER: What the salesperson is doing is aligning their interests with the customer’s interest, essentially bringing them behind the scenes, here’s how it really works, here’s how to maximize your benefit, I’ll maximize mine.
COLIN WONG: The theme here is really around unintended consequences. So, the folks who have designed these incentive plans had very noble goals of incentivizing customers or incentivizing their salespeople, but what they don’t always think through is, what’s the unintended consequence? And as Tim pointed out, I don’t think anybody ever intended to have their salespeople partner with a customer to sort of collaborate on gaming the system, or I don’t think anybody ever intended that an airline check-in agent would use an incentive around credit cards to give a customer, to waive the fees for their check bags. So I think that’s a theme of, or a learning from this article is, be on the lookout for those unintended consequences.
CURT NICKISCH: What are the unintended consequences here? What’s wrong with that? The company is trying to get customers to sign up for something, it’s rewarding salespeople to promote those products. So, what is wrong with that partnership in profit?
COLIN WONG: Yeah, I think the most common sort of unintended consequence would be additional cost for the company. So, if a salesperson is using a customer incentive unnecessarily or signing up a customer who subsequently closes a product or an account, the company is incurring costs, not only in what they pay the salesperson in commission, but then the costs associated with setting up the products and the accounts. And so it sort of defeats the purpose of the incentive plan, which is to grow the company’s revenues.
CURT NICKISCH: So, there were also some ways that seemed to have to do with data, like sandbagging, falsifying data, creating fake customers, which gets back to the issue of kind of measuring what matters, right?
TIM GARDNER: Of course, sales systems rely on various data inputs to function, pay out, to motivate. And what we found is that salespeople are not always honest with the information that they report back. Again, it’s something that we have heard of, but this was a nice way to look carefully at it, is this idea of creating false customers.
I think it’s much more common than people realize. And that instead of engaging with real customers for demos, for purchases, for purchase intentions, salespeople will take advantage of the system by creating out of thin air, people. Having them behave in certain ways that earns them incentives and then having them cancel early or pull out of the process after they’ve made their payments.
The other one, as you brought up, is falsifying data. Essentially, lying to the sales management system about number of visits, where the visits are taking place, deals that were not actually completed. It’s a complete perversion of what the plan was designed to do. Companies have to put trust in their salespeople, and falsifying data is a violation of that trust, illegal, and potentially fraudulent for everyone involved.
CURT NICKISCH: Some of the examples that you mentioned in your article were things like employees getting relatives or friends to open accounts and then close them later. Falsifying data by putting somebody else’s credit report, somebody else with the same name on a bank account or mortgage application. And then also things like salespeople going into their sales tracking system and adding their names to deals that they really had no part in, but just to change the reporting so that they benefit more at the end of the month.
TIM GARDNER: And the big one that’s also misleading is obviously misleading the company and the sales system, but misleading customers. Lying about delivery dates, the functionality of the product, testing on the product. Telling the customers things that aren’t true to encourage them to make purchases that they might not have made if they had known all the information.
CURT NICKISCH: Well let’s talk about ways to identify these issues. What are you recommending company leaders to just to take on this mindset?
COLIN WONG: And so in terms of what to do about it, you can use the eight categories and try to overlay those on your plan design and think like a gamer would. Think of these different scenarios, and are those potentially applicable or could those come to life in your incentive plan design?
For example, if you’re trying to identify maybe the faux customer scenario, where people are making up customers and then closing the accounts or the product after some time period. If you think that might be happening, then the next thing would be to use data available from your sales tracking system or your sales management system and see if you can tease out any patterns in the data.
Are there frequent occurrences of accounts getting closed, say 90 days after they’re open? Because that 90-day window is how long it has to be open to receive credit. And if you see that pattern occurring, then you use the data to determine, is it widespread? Is everybody in the company doing it or is it isolated to just a couple salespeople? And then the last piece of course is then deciding, do you want to do something about it at all?
TIM GARDNER: We knew when people read this, no one was going to fall out of their chair and say, “I had never thought of these before,” but what this list does is it creates this full inventory of the very main, most common ways, and it allows you to systematically review it. So as Colin talked about, as you’re designing the plan, it allows you to talk to other people who can give input on how the incentive system might be gamed or you yourself, to just systematically go over as just a powerful checklist to make sure you’re covering all your bases.
CURT NICKISCH: Now, shouldn’t your managers of sales teams kind of be tuned into this and alerting you to it as a company leader?
COLIN WONG: Yeah. I mean, absolutely, but to a certain extent, it depends on the culture within the organization. There may be instances where the sales leaders perhaps are themselves encouraging some of this behavior because they benefit from it as well. But ideally, yes, your sales managers are going to be looking out for the interests of the company overall and bringing scenarios of gaming to the attention of those responsible for the plans.
TIM GARDNER: And Curt, it’s also important to understand that there’s two different groups of people. You have your sales leaders and your sales operations teams, which are going to design, document and manage the sales incentive plan. And so unless the sales operations team and the sales designers in particular reach out to their sales leaders and other salespeople, they’re not going to have a good idea of how to prevent potential gaming.
CURT NICKISCH: What do you do about it when you find it or when you anticipate it?
COLIN WONG: Right, so if you do discover that there’s some gaming occurring, you want to, as we said before, use the data to determine a couple things. One, how prevalent or frequently is it occurring? And then two, what’s the impact of the gaming? Depending on which combination of frequency and impact, that will sort of guide you to how you respond.
There may be instances where low frequency and relatively low impact, you decide not to do anything and you just monitor it for any changes in the frequency or the impact. Other examples where it’s a more egregious impact, possibly something fraudulent or illegal, whether it’s happening a lot or just a little bit, with those types of outcomes, you definitely want to put in place actions that shut it down. Performance management of those individuals that are doing the behaviors, controls and monitoring to make sure it doesn’t happen again in the future. Possibly even changing your incentive plan design to prevent the behavior in the future.
CURT NICKISCH: Well, that one end of the spectrum that is maybe more innocuous or low impact, I’m curious what an example of that is and why it might be okay to tolerate rather than kind of rock the boat with your sales team.
TIM GARDNER: By far, the most common way that salespeople game incentive plans is sandbagging, and that essentially is holding off on submitting sales at one end of the sales at the end of the sales period, and then stacking it and adding it to the beginning of the next sales period. And that allows them to take a small loss in the previous period and then potentially huge gains in the next pay period. All salespeople do this, they have to manage or just feel great pressure to manage the ups and downs of their earnings cycle and sales cycle. It’s just something that’s going to go on.
For most circumstances and how most people game or use sandbagging to game the system, the financial outcome is not that large. It’s not zero, there’s a research study that we weren’t able to put into the paper, but that can reduce sales revenues by four to 6%. So, it’s important and not a non-zero number, but it’s something all salespeople do, it’s very hard to eliminate. And the time and energy spent in trying to track it, stop it, prevent it, is probably not going to be worth all the effort and the cost.
COLIN WONG: And that sort of idea of the time and effort to prevent it, I think is the important factor, because just introducing a change in your incentive plan, for example, and rolling that out and communicating it, especially if you have a large sales force. That takes a lot of energy and it could ruffle some feathers with your salespeople and maybe your top performers get disgruntled because of this. So again, back to that unintended consequence, you may be trying to fix a situation that is relatively low impact and it inadvertently creates a lot of turmoil and wasted energy through the communication process.
TIM GARDNER: Curt, several of the people that we talked to would say, “It’s not our top salespeople that are gaming the system,” not to say they’re completely immune, but that’s not where the problem generally is. It’s the people that are struggling and maybe the mid-level performers. And so making these changes, like you say, could bother or irritate your top salespeople and they have options to go somewhere else. And so as Colin really emphasizes, making the change to fixed gaming can be disruptive and it can cause problems with people that stay and it can drive people away.
CURT NICKISCH: Well, let’s go to another example, and certainly at the criminal, fraud, legal risk, compliance risk, regulatory risk. We understand that end of the spectrum, and it’s not just kind of changing the system, you’re alerting a lot of other people in the company to it. But let’s go with some case that’s kind of in the middle, and Colin, early on you mentioned airline agents promoting the airline credit card and waiving customer baggage fees. Can you explain that a little bit and how company leaders might approach that problem?
COLIN WONG: The idea that some people may be familiar with is if you travel and use a co-branded credit card with the airline you’re traveling on, that’ll often allow you to check your checked luggage for free. And so, one of the ways that the check-in agents might game their incentive system is offer a customer to sign up for the credit card right there on the spot. And in return, waive the baggage fees for that customer right there and then, without knowing whether the customer has been approved for the credit card or anything, but merely by taking the application. And so, that’s an unintended consequence of the plan design that the agents are using the incentive that way.
CURT NICKISCH: And what’s the problem with that? Just the fact that a lot of these might get declined and so it’s too much of a revenue?
COLIN WONG: Yeah, it comes back to the costs that the airline is incurring. Yeah, because there’s a cost associated with processing that application. Yeah, and if the customer is not approved, the airline has spent that money on the approval process, but in return, they gave up the revenue that they might’ve received from the check bag fee at the time.
CURT NICKISCH: On the other hand, maybe the agents are onto something, that it actually would be a good benefit to offer consumers to get them to apply.
TIM GARDNER: It’s a tricky balance. In the company that we interviewed, this was against their policy to do this. And so, the people doing this that may… You could argue that it may have a positive impact on the revenues and the sales that they were seeking with this process, but if only a few people were doing it, they were going to get more bonus, the people who were following the rules and following the procedures were not. And so it builds in fairness and just sticking with policy issues in there as well.
CURT NICKISCH: So, this is all really interesting and what if the incentive structure has been baked into your organization for a long time? Like, we’ve always been promoting this product this way. Isn’t it hard to change that behavior?
COLIN WONG: So, absolutely. When things are ingrained in a company for a long time, that inertia is hard to overcome, but we also have a saying, “What is the cost of doing nothing?” And I think that’s important to consider here. It could be that no one has ever taken a look to understand how some of these gaming behaviors are impacting the company. Yes, they could have been going on forever, but do we really understand what it’s costing the company in lost revenue or excessive commission payments? Is there any risk that these behaviors are putting the company at risk in other ways?
TIM GARDNER: Curt, another way to look at this is that if you look across a large number of sales plans, over any five year period of time, 80% of those plans are going to be completely changed or seriously revised. And so, sales operations team leaders are going to be constantly evaluating sales plans of, are they meeting goals, making changes, and making those adjustments? What our typology does and what our system provides is a systematic way to do that. And if it’s discovered that there are high frequency and or high impact gaming tactics being used, that the plan would have to be changed and that wouldn’t be terribly unusual, consistent with how plans are typically managed.
CURT NICKISCH: When you make that change or you decide to do that, Tim, you said it’s normal to do it, but how do you communicate that? What do you recommend for getting buy-in from the sales team and making sure you’re not ruffling feathers or turning some of your best salespeople away?
COLIN WONG: So, one of the first steps that I would recommend is collaboration with your sales leadership, even before you start introducing the changes, even coming up with what changes in your plans that you want to make needs to be a collaborative effort if you’re going to get that buy-in later on down the road. Similarly, collaborating with your sales leadership around applying this framework. They’re in the best position to help you understand if any of these scenarios in the framework could possibly happen under the new plan design. And they’ll help you think like a gamer to identify where you may have to plug some gaps or where you may decide to not do anything at all. But using their expertise and being able to go to the rest of the sales team and say, “Look, this wasn’t designed in a vacuum. This was a collaborative with your leadership and they were looking out for your interests.” That goes a long way when you start communicating a new plan or changes to a plan.
CURT NICKISCH: And Tim, what’s your hope from these insights from your research? What do you hope people take away?
TIM GARDNER: One of the biggest takeaways is that in the big picture, we are not just talking about salespeople. We tried to use this study to maybe illustrate a little bit of the human condition. We as individuals, people, human beings, are always looking to make shortcuts in our life and in our career. And so, one important takeaway is that we are not saying that salespeople are more or less likely to game or cheat systems than others, this is something that people do. An important takeaway is if people will see this as kind of opening their eyes, that while you may be a great person and maybe not cheat the system, typically, people are looking to do so, make you aware of it and make you think carefully about how to prevent it and how to find it.
CURT NICKISCH: Tim and Colin, this has been really helpful and insightful. Thanks so much for coming on the show to take us through your research and how people can recognize this problem and deal with it.
TIM GARDNER: Thanks for having us.
COLIN WONG: Thank you, Curt.
CURT NICKISCH: That’s Huntsman School Professor Timothy Gardner, and consultant Colin Wong. They’re coauthors of the HBR article, How Salespeople Game the System. And if you want to earn bonus listening, we have over 1,000 episodes and more podcasts to help you manage your team, your organization, and your career. Find them at hbr.org/podcasts, or search HBR in Apple Podcast, Spotify, or wherever you listen.
Thanks to our team, Senior Producer Mary Dooe, Associate Producer Hannah Bates, Audio Product Manager Ian Fox, and Senior Production Specialist Rob Eckhardt. Thank you for listening to the HBR IdeaCast. We’ll be back on Tuesday with our next episode. I’m Curt Nickisch.
