The Effects of Quota Frequency: Sales Performance and Product Focus
Doug J. Chung, Das Narayandas, Dongkyu Chang
Management Science, forthcoming
Firms often struggle with designing an appropriate compensation scheme to motivate their employees. In this study, Dr Dongkyu Chang, Assistant Professor, Department of Economics and Finance and co-authors focused on one of the under-researched aspects of employee compensation: evaluation frequency. More specifically, this study asks: what is the appropriate temporal frequency for quota targets (for example, monthly versus daily targets) to best motivate salespeople?
To answer this question, Chang and co-authors first developed a theory on how salespeople adjust their behaviour under different quota frequencies.
“We predicted that frequent quotas would induce more continuous motivation, especially for low-performing salespeople,” says Chang.
Under a long-quota-cycle plan, salespeople who started off poorly may lose motivation after realizing they weren't going to make their quota at the end of the quota cycle — in essence giving up.
“More frequent quotas would help avoid such demotivation. On the other hand, the theory also predicts that frequent quotas could push high-performing salespeople to switch their effort from high-ticket to low-ticket products, reducing the firm’s profits.”
To test the developed theory, the researchers conducted a large-scale field experiment with salespeople at a major retail chain in Sweden. The firm directly employs about 350 salespeople for more than 80 stores. Prior to the experiment, the employees had been evaluated and compensated for their sales performance under a monthly quota cycle. To observe the effect of a change in the quota frequency, the field experiment implemented a daily quota cycle for employees across the firm’s stores (treatment group) for the month of May 2015. The original monthly quota cycle was kept in place for employees at five stores (control group) to compare their performance with the employees under the newly introduced daily quota cycle.
“We observed that daily quotas did improve the productivity of low-performing salespeople, consistent with our hypothesis,” says Chang.
Specifically, the data reveals that the bottom quartile of salespeople experienced an 11.7% boost in their productivity under daily quotas.
“We also found that high-performing salespeople shifted their focus toward selling low-ticket items under daily quotas, again consistent with the theoretical prediction.”
This change led to an 8.1% decrease in sales among the top quartile of salespeople, reducing the firm’s profit.
The findings provide implications for the design of the sales compensation structure. Companies should be cautious that a change in quota frequency can have varying effects on different employees. Companies also need to be mindful of unintended consequences, for example, leading employees to focus on certain types of tasks at the expense of performance in other tasks.