Variable compensation plans are generally seen as one of the best ways of motivating salespeople. A US study examined the impact of various types of variable compensation system changes (VCSCs) on the job satisfaction and performance of salespeople. Focusing on the various VCSC dimensions, such as the size and frequency of changes, the researchers found that VCSCs do impact significantly on salespeople’s job satisfaction and performance, but the size of the impact can differ based on various environmental factors.
Key Topics: Variable compensation system; Sales compensation; Job satisfaction
Title of Reviewed Article: Dimensions and contingent effects of variable compensation system changes
Researchers: Jeff S. Johnson (University of Missouri–Kansas City), Scott B. Friend (Miami University), and Arvind Agrawal (University of Nebraska–Lincoln).
Publication: Journal of Business Research, 2016, Vol. 69 No. 8, pp. 2923–2930.
Setting the Scene
Sales compensation systems have long been acknowledged as a fundamental tool in motivating salespeople (Brown et al., 2005), and research suggests that salespeople are particularly responsive to monetary incentives (Darmon, 1987). Much research has been undertaken in an effort to determine the optimal sales compensation system for eliciting the desired performance from salespeople (Krafft et al., 2012; Zoltners et al., 2001) and well-designed sales compensation systems have been shown to have the ability to induce high sales performance (Lopez et al., 2006).
For most companies, the competitive environment is becoming increasingly demanding and complex and as such there is a greater need to regularly modify and adapt sales compensation systems to ensure alignment with market conditions (Lopez et al., 2006). As such companies are challenged with issues relating to if, when, and how to change sales compensation systems, knowing that there could be negative consequences as well as benefits to such changes (Bartol, 1999; Dustin & Belasen, 2013).
This study focuses on various aspects of variable compensation system change (VCSC), namely the frequency, magnitude, and implementation speed of such change, and how these factors effects the performance and job satisfaction of salespeople. Research suggests that these factors have the potential to have positive and negative effects. For example, high frequency of changes can help to keep extrinsic motivation at the forefront of salespeople’s minds and serve to keep companies aligned to environmental conditions (Krafft et al., 2012), although too much change can reduce the motivating power of sales plans (Zoltners, Prabhakant, & Lorimer, 2012).
Additionally, environmental conditions, namely technological turbulence (or change) and competitive intensity, are considered in this study to gauge the interplay with the effects of VCSCs on salespeople, as such factors have been shown to have a strong bearing on the type of sales compensation system needed (Krafft et al., 2012).
The researchers put forward two primary research questions, which are:
Hypothesis 1 – “Technological turbulence and competitive intensity are expected to moderate the relationships between VCSC frequency, magnitude, and implementation speed and salesperson performance.”
Hypothesis 2 – “Technological turbulence and competitive intensity are expected to moderate the relationships between variable compensation change frequency, magnitude, and implementation speed and salesperson job satisfaction.”
How the research was conducted
Participants in this study consisted of 306 full time business-to-business salespeople located in the US and were obtained from an online respondent panel company. These salespeople were from a wide range of industries, including Technology/Communications, Consumer Goods, and Financial Services/Consulting.
Competitive intensity was assessed via the Slater and Narver scale (1994), technological turbulence was assessed via the Sethi and Iqbal scale (2007), salesperson performance was assessed via the Fang, Evans, and Zou scale (2005), while job satisfaction was assessed via an adapted version of the Agho, Price, and Mueller scale (1992).
The researchers developed a questionnaire to assess the VCSC dimensions of change frequency, magnitude, and implementation speed.
Key Research Findings
The results found that VCSC frequency–technological turbulence interaction has a positive impact on salesperson performance, while VCSC frequency–competitive intensity interaction has no effect on salesperson performance.
The technological turbulence–magnitude interaction was found to have no effect on salesperson performance, while the competitive intensity–magnitude interaction has a positive impact on salesperson performance.
The technological turbulence–implementation speed interaction was found to have no effect on salesperson performance, however the competitive intensity–implementation speed interaction has a negative impact on salesperson performance.
Results were mixed in relation to job satisfaction. The VCSC frequency–technological turbulence interaction was found to have a positive effect on job satisfaction, while the VCSC frequency–competitive intensity was found to have no effect on job satisfaction. Both VCSC magnitude–technological turbulence and VCSC magnitude–competitive intensity interactions were found to have no effect on job satisfaction.
Both technological turbulence and competitive intensity were found to attenuate the VCSC implementation speed–job satisfaction relationship.
Consistent with prior research (Rao & Turner, 1984), this study found that under certain conditions environmental factors interact with VCSCs positively, from a frequency and magnitude perspective, and negatively, from an implementation speed perspective. This builds on previous research which indicates that both desirable and undesirable consequence can come from these interplays.
The findings also indicate that VCSCs examined in isolation are not predictive of sales performance, but rather it is the conditions under which VCSCs are made that predict their effects. For example, the results indicate that technological turbulence and change frequency positively interact in predicting job satisfaction and performance. Frequent VCSCs help align salespeople with technological shifts when technological turbulence is high, leading to greater performance, while under low technological turbulence conditions, the results suggest that frequent changes may be detrimental to performance.
Organizational and Reward Implications
Given the ever-changing market environment, it is a fact of life for most sales divisions that amendments need to be made to the structure of sales compensation systems in order keep sales compensation consistent with the goals and objectives of the company. This study highlights that in designing sales compensation systems companies need to not only assess the market conditions but also be mindful of frequency, magnitude, and implementation speed of changes to sales compensations as these factors can have a significant bearing in the success of the sales plan. Thus, it is imperative that companies appropriately balance the need to react to market conditions with the desired behaviours of salespeople.
This study also gives further insight into when companies might appropriately increase the frequency and magnitude of their VCSCs. For example, when competition is intense, the study suggests that companies should make significant changes to their sales plans rather than making numerous incremental changes, but that such changes may not be conducive to sales performance under conditions of technological turbulence.
This study provides valuable insight into the role of VCSCs on the performance and job satisfaction of salespeople across various industries. While this study builds on this research area, future research could benefit from accessing the effects of VCSCs over a longer time period. It would also be interesting to see future research examine VCSCs effect in the context of the total compensation offered to salespeople, which typically include both fixed and variable components.
Source Article: Johnson, J. S., Friend, S. B., & Agrawal, A. (2016). Dimensions and contingent effects of variable compensation system changes. Journal of Business Research, 69(8), 2923-2930.
Published by: Elsevier Inc.
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