In the last few weeks I have studied many sources. Now is a moment for an update.
Variable pay is effective, on low skilled work
In various laboratory experiments it had been proven that variable had positive effect on output especially in lower skilled work.
2 papers that I’ve studied have found empirical evidence for this:
The first is a chain of shops in the USA where they started working with variable pay in 15 locations. Sales increased for the whole researched period, being 2 years.
There was a bigger turnover in staff in the year, as expectations increased.
The second is Finnish research, from a unique data set of 2006 firms analyzing 7820 “firm years” between 2002 and 2011 divided “white collar employees”, divided according to http://www.ilo.org/public/english/bureau/stat/isco/.
This research shows that
- a 1 percentage point increase in WCE performance-based incentive increases the future ROA of the firm by about 0.21 percentage points
- a 1 percentage point increase in the performance-based incentive for WCEs at the low-level task complexity increases future ROA by about 0.38 percentage points.
- for lowlevel WCEs, this relationship plays an important role only when performance-based incentive compensation is large enough, i.e., exceeding 5 percent of the fixed salary.
- The performance effect of incentive compensation decreases as task complexity increases.
One of the questions I have for this research is why it is more normal to use variable pay for sales and management, and not for the rest of the organization.
As sales is getting more and more complex and with the results above, it would make sense to use variable pay at least for lower skilled work. Please not. If you are not planning to change your payment structure now, please wait until we have finalized the research so you will be better prepared. Changing 1 thing can easily snowball into changing many things.
Can we make sales more simple?
In some cases you see specifying tasks in sales. BDR, SDR, onboarding specialist account management, account executive etc. are roles used to break the cooperation with customer in pieces. When you narrow this down you can create specialists eg. create a production line in sales with narrowed down tasks.
If this is effective as a method I do not know. For inspiration I would like to direct you to the article how Hubspot used compensation to steer activities. Setting the right KPI’s is difficult. Apparently, they managed well. But be aware when pointing to effective drivers afterwards. Success has many fathers and failure is an orphan.
All updates are on: https://www.maver.nu/deelnemers-onderzoek/
For now I wish you happy holidays and all the best for the new year.
I am looking forward to making this research a great success together with you.
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If there is anything that I can do for you, let me know.