Perspectives from ISB

Panelists: Prof. Madhu Viswanathan, Assistant Professor, Indian School of Business, Mr. Satya Mahesh Kallakuru, Head of Business Excellence, Emcure Pharmaceuticals, Mr. Ajay Kumar Mishra, Chief Marketing, Tata Steel Limited and
Prof. Raghuram Bommaraju, Assistant Professor, Indian School of Business [Moderator]

Date: September 03, 2020
Compiled by: Minal Agarwal, Manager, ISB-Centre for Business Markets

ISB-Centre for Business Markets is conducting a series of Knowledge Creation Seminars. These seminars aim to create new knowledge in the marketing and sales domain. The objective is also to provide a platform that allows for easy exchange of ideas and better collaboration between academicians and practitioners. The first seminar in this series was a discussion on Activity-Based Incentives (ABI) for salespersons and sales managers.
During the session, Professor Madhu Viswanathan presented his research done on the impact of ABIs on sales productivity, which identified conditions under which they work and on whom they work (salespersons or managers). His presentation was followed by a discussion with Mr. Satya Mahesh and Mr. Ajay Mishra, who are industry practitioners, with long experience in leading sales efforts in large companies. They shared their insights on the practices followed in their organisation and the practical challenges they have faced in implementing activity-based incentives. Professor Raghuram Bommaraju moderated the session.

The Research:
Sales Incentive is an extensive topic, and there is an expenditure of around a trillion dollars done on salesforces globally by organisations. However, there is a need to study and understand the impact of sales incentives on the performance of the sales team and the sales productivity of an organisation. In the recent past, due to the availability of micro-level data, it has become feasible to study and analyze the implications of marketing and sales strategies employed by the organisations.

Activity-Based Incentives incorporate activity scores from the salesperson’s call reports into incentive compensation. Research reveals that 15% of firms have incorporated activity-based incentives into practice.
Although some firms have deployed Activity-Based Incentives for salesforce compensation, they do not have concrete answers to the following questions:
• Do the activity-based incentives work?
• Do they improve performance, or are these just an additional activity?
• When do ABIs work and when don’t they?
• Who should be incentivized for these activities, salesperson, or his/her supervisor?

A joint study on ABI pay was done by Professor Raghunath Rao, the University of Texas at Austin; Professor George John, University of Minnesota; Professor Madhu Viswanathan, Indian School of Business, and Mr. Sunil Kishore, Partner at McKinsey. They ran an experiment for three years on a large Pharma company. In the first year, there was no ABI pay. The second-year was divided into two periods of six months and three months. For the first period, ABI pay was introduced for both front-line salespeople as well as their supervisors. For the second period, ABI pay was given only to the supervisors and was taken away from the salespeople. In the third year, they returned to the status quo ante after removing ABI pay from both salespeople and supervisors. In this period, all the other factors which could impact sales were kept constant.

The study was done on the front-line salespeople and their supervisors across 305 sales territories showed a robust sales gain of around 8% from each ABI interventions relative to the “no ABI pay” situation. Some of the significant findings of this research are:
• Activity-based incentives are very valuable, and they do increase sales performance
• The research also showed that the territories with more salespeople recorded a considerable gain in sales
• ABI pay increases the output of both the salespeople and their supervisors.
• The supervisors exert more control on salespeople for the successful execution of the activities designed
• The ROI is better if the Organisation incentivizes the managers only and not the salespersons.

The takeaway is that the organisation is better off from an ROI perspective by introducing ABI pay for the managers as the managers are the ones who are controlling and allocating the activities of the salespersons. ABI pay is more effective in the territories where there are more numbers of salespersons.

Comparison between the Pharma Industry and Manufacturing Industry for the Impact of ABI pay on sales performance:

In Pharma Industry, ABI payments have become prevalent in the last decade. Previously, when there was no ABI pay, the Organisation would do the following:
• Recognize the salespersons for their work in quarterly/annual meetings
• Reward the salespersons based on the revenue generated for the organisation
• Award them for overall excellence, taking into account sales revenues as well as activities performed to achieve them.
However, during the last decade, companies have moved from traditional sales incentives to effort-based incentives after realizing the importance of ABI pay. The Pharma industry requires well-thought-out activities that help in building a brand. Therefore, activity-based incentives help in achieving sustainable sales and building relationships with clients.

Manufacturing Industry, on the other hand, has various other integral divisions apart from Sales, which are involved in creating the overall customer experience: Mining, supply chain, and production, among others. There are various cross-functional projects undertaken, and hence it becomes challenging to incentivize just one team (namely, sales). Therefore Activity-based incentives do not work very well for organizations that are primarily into manufacturing. Such organisations focus on building a culture that encourages a collaborative way of working.

Impact on incentives and especially activity-based incentives during Covid-19
The Covid-19 situation has forced organisations to move faster into the digital mode of communication with their clients. A lot of organizations are focusing on training their salespersons and enhancing their skill sets. They are also taking care of the well-being of their employees, not just through monetary incentives but also by the empathy and care shown for them.

Companies have enhanced communication with channel partners as well as clients, which helps them cultivating enduring relationships in these times of crisis.