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GAME THE PLAN
EVERY SALES REP'S DREAM; EVERY CFO'S NIGHTMARE
By CHRISTOPHER W. CABRERA
River Grove BooksCopyright © 2014 Xactly Corp.
All rights reserved.
ALL THE WORLD'S A STAGE ... FOR INCENTIVES
The word incentive comes from the Latin word incantare, which means "to chant or charm." But while the Romans may be credited with the origin of the word, they didn't fare as well with the concept. One factor contributing to the decline of the Roman economy was that the government provided absolutely no incentive to farmers to ramp up production of staple crops. In fact, governors taxed them for increased production instead of rewarding them.
We've come a long way since the days of Julius Caesar. Governments, educational institutions, and businesses (and just about every other type of organization) have used incentives for hundreds—maybe thousands—of years. They've changed with the times, growing more sophisticated and being studied by management science specialists, psychologists, and leaders in government, education, and business. Today, acceptance that incentives are what makes the world go round has resulted in an industry exclusively designed to help organizations motivate employees to increase productivity and, ultimately, profit.
The way we incent will continue to evolve in response to changes in the world. But what hasn't changed—what won't change—is what incentives are at their very core: tactics we use when we want to bring about change and steer people's actions in specific directions.
The Oxford American Dictionary Webster's defines incentive as "a thing that motivates or encourages one to do something; a payment or concession to stimulate greater output or investment." it's also worth noting that, according to Webster's, the first known use of the word incentivize was in 1970 coined in the late 1960s.
At its very best, an incentive is also a trade. In order for an incentive to fulfill its purpose, both parties must gain from the action the incented person makes.
Let's consider what these win-win situations have looked like over the past few centuries.
PIRATES OF THE COMPENSATION
For all we know, the use of incentives may have started with the Cro-Magnons, but since we have yet to find evidence on cave walls, let's start in the golden age of piracy, between 1716 and 1722.
When you think of early-eighteenth-century pirates, you probably think of illegal activity, unruly mayhem, and violence. Your perceptions are no doubt correct. But as disorderly as a band of pirates may have seemed on the surface, it was no accident that they ruled the seas. It boiled down to manpower. The average crew size of a pirate ship was between 80 and 120 men. Captain Henry Morgan, who led the largest pirate organization of the time, commanded two thousand men and thirty-seven ships. Yet a typical merchant ship had fewer than twenty crewmen aboard. What gave Captain Morgan and his fellow pirate captains the ability to attract so many more men than anyone else? A winning approach.
When you think of the words pirate captain, swashbuckling adventures probably come to mind. But you might be selling men like Captain Morgan short by not seeing them as leaders who had developed a management structure highly focused on engaging, motivating, and retaining their "employees." To better understand how incentives worked on the high seas, let's spend a day in the life of the highly effective Captain Morgan.
Recruitment, Engagement, Motivation—Pirate Style
His dress code was undoubtedly more relaxed on the ships he commanded, but Captain Morgan decidedly had a lot in common with today's CEOs. His goal was simple: to get as much "booty" as possible by terrorizing the Spaniards more efficiently than his competitors did.
Like the average CEO, Captain Morgan experienced pain points.
First, he had to recruit and retain the manpower necessary for successful plunder. This meant competing with merchant ships and the Royal Navy for the best men.
Second, he had to motivate the crew to be as productive as possible while incenting them not to steal booty—a pretty tall order when you consider the lack of ethics and morals among these bad boys. But the captain could not do so with an iron fist or in any way that was contrary to the crew's goals. Otherwise, he would be walking the plank.
Lucky for Captain Morgan, recruitment was made easy in large part because of the "leadership" exercised by the captains of the merchant ships, men driven by a solitary goal: to make the absentee owners of the ships happy. Quite often this came at the cost of the happiness of crew members, who were frequently cheated and treated cruelly. These sea dogs didn't need much convincing to jump ship.
With crews in place, Captain Morgan and others of his ilk made sure their jack-tars toed the line by incenting them to adhere to a strict code of behavior. While important positions such as captain, quartermaster, and surgeon received a bit more of the bounty, for the most part the loot was divided evenly among the crew. A motto of "no prey, no pay" motivated all pirates to put forth their best efforts. Those who attempted to steal bounty were swiftly and severely punished. But such instances were rare because the men knew that if they performed, the captain was a man of his word who would give them their fair share of the loot. The pirates were less likely to pinch it and more likely to work as a team.
Savvy Captain Morgan also knew the best incentive involves a payment or concession to stimulate greater output or investment. Merchant seamen in the period between 1689 and 1740 earned thirteen to thirty-three British pounds per year. In comparison, a pirate who had a good day on the water that ended with the capture of a treasure-laden fleet could earn one thousand pounds.
Doing the math, that means it would take the lowest-paid seaman seventy-seven years to earn what a pirate could earn in one day!
How's that for sufficiently motivating your team to steal, murder, and risk death (if caught)?
Captain Morgan and his men were bad, but they left a legacy when it comes to the understanding and use of incentives. After all, how many CEOs do you know who have a popular brand of rum named after them?
THE NAPOLEONIC WARS: WINNING BATTLES WITH INCENTIVES
Let's hop to the late 1700s and early 1800s, a time when incentives proved their mettle on the battlefield.
Napoleon Bonaparte, tyrant though he may have been, perfected the use of incentives during his reign as emperor of France, turning a legion of ragtag soldiers into a highly motivated group of conquerors. Standing only five feet two inches and teased as a child for being the boy from Corsica who couldn't speak proper French, Napoleon had something to prove. Like many generals before him, he used fear to motivate. When Major-General Louis Berthier met Napoleon in 1796, he said, "I don't know why, but the little bastard scares me."
Tight Budget? Create Creative Incentives
But fear alone wouldn't fix the mess Napoleon stepped into. When the brilliant military strategist first met his army, the men were in ill health and hadn't been paid in months. The soldiers knew the country was broke and that payment was unlikely, regardless of their behavior, so there was no incentive for them to perform.
Knowing that his success was tied to the soldiers around him, and that their success depended on their level of enthusiasm for their missions, Napoleon's goal was to create a win-win situation for himself, his soldiers, and, ultimately, his country. But like many of today's CEOs who face budget cuts and constraints, Napoleon had little to work with. If he was going to win wars, he was going to have to think outside the box.
Therefore, he stood in front of his men, and made them this promise:
Soldiers, you are naked, ill fed! The Government owes you much; it can give you nothing. Your patience, the courage you display in the midst of these rocks, are admirable; but they procure you no glory, no fame is reflected on you. I seek to lead you into the most fertile plains in the world. Rich provinces, great cities will be in your power. There, you will find honor, glory, riches.
Piedmont, the Precursor to Profit Sharing
Napoleon understood that appreciating his soldiers was one way to gain their loyalty. He also knew of no better way to show appreciation to an unpaid army than through monetary rewards. So when his soldiers performed well in Italy's Piedmont region, causing the enemy army to surrender, Napoleon demanded the vanquished foe's silver and gold.
Napoleon used that silver and gold to pay his men, establishing the link between pay and performance. From that point forward, his men knew that, regardless of the financial state of France, if they battled hard enough and won they would be rewarded with wartime spoils. Just as modern profit-sharing plans motivate collaborative success, this was enough of an incentive for these starving, ragged men to change their behavior.
Appreciation, Recognition, and "Gamification"
Since money was tight, and tangible rewards not always accessible, Napoleon had to think of other forms of motivation. One way he showed his appreciation for soldiers was by creating the Legion of Honour, which recognized individual men for their contributions. And in what might be one of the earliest forms of "gamification," Napoleon rewarded men who were named by their battalion leaders as "bravest," "strongest," or any other number of superlatives by giving them medals from his own jacket. You can bet that small but meaningful incentive kept soldiers on their toes and wanting to perform their best.
Despite significant odds, Napoleon's army went on to capture much of Europe before being defeated at Leipzig and Waterloo, proving that even in tough times, a thoughtful approach to incentives yields win-win results.
THE 1920S: A DECADE OF PLENTY AND THE BIRTH OF THE AMERICAN SALESMAN
In the 1920s, great economic and social transformation gave birth to modern sales management.
Formally Introducing ... The Sales Incentive
The Roaring Twenties was a period marked by major advances in technology and manufacturing that led to innovation in business, changing social roles, and economic prosperity. These advancements improved the agricultural sector, promoted growth in the automobile industry, provided electricity to homes and businesses, improved communication with the development of radio networks and long-distance telephone ability, and made life at home easier with the invention of time-saving household appliances.
Improved manufacturing processes and the introduction of the assembly line resulted in the faster and cheaper production of automobiles, making them more accessible to the masses. For example, by 1928, a Model T Ford rolled off the production line every twenty seconds and cost the average American worker about three months' wages—instead of the pre–World War I price of two years' wages.
As business machines, appliances, and cars were manufactured on scales never seen before, organizations needed to find new ways to create demand for and compete in selling them. And so they hired droves of salesmen. But these weren't the peddlers and snake oil salesmen of yesteryear who sold elixirs, cure-alls, and tonics they vowed would do everything from grow hair to bring God to heathens. Manufacturing had created a system for producing goods, and it was time for organizations to approach sales in the same systematic way.
Giants such as Eastman-Kodak, Coca-Cola, General Electric, and Wrigley's assigned territories, set quotas, and began to measure success. Salespeople were being asked to do more than ever before: explain products, and create demand for products, even service products.
At IBM, Chief Executive Thomas J. Watson Sr. hired only the best and the brightest from the country's most prestigious universities. He developed a six-week training period to guarantee that they knew the product and could sell it in an educated manner. Watson put his salesmen in conservative suits, taught them how to conduct themselves among professionals, and coached them about pushing customers to buy products they might not otherwise buy.
Burgeoning capitalism was surely strengthening the link between pay and performance, which expanded well beyond the sales office and into general society in 1930, Babe Tuth made $80,000. When he was asked why he should make $5,000 more than president Hoover, he responded, "I'm having a better year than he is."
Large companies invested a lot in "professionalizing" their employees, and productivity was critical to their success. To hedge their bets, corporate leaders began to focus on sales incentives. For the most part, these leaders used simple cash incentives coupled with recognition. IBM's Chief Executive Watson, for example, developed a scheme that rewarded salespeople who met their quota with bonuses and induction into the elite Hundred Percent Club.
Eventually, a tanking economy and an imbalance between labor supply and demand shelved incentive-based compensation during the Great Depression. But it was far from dead.
DELAYED GRATIFICATION? A REVIEW OF INCENTIVES IN THE 1940s
In the 1940s, organizations moved beyond the idea that incentives could drive behavior in general, such as putting forth best effort, and focused instead on how they could be used to drive specific behaviors, like selling a certain number of units within a specific time period. During this decade (and actually up through the 1960s), the use of incentives took on a new level of creativity. Allow me to set the stage for that shift by rolling the clock back to the early twentieth century.
Short-Term Incentives, Long-Term Lags
Moguls in the early 1900s, including Andrew Carnegie and John D. Rockefeller, were set on building companies that would last forever and sustain their families through steady growth. That tack was an incentive for leaders, who were often relatives, to think long term. But as more and more non-family-run businesses entered the marketplace, the professional managers who led these organizations were less concerned about future success and more concerned about success while they were on board. It wasn't uncommon for such managers to focus only on the upcoming year, or even the upcoming quarter.
In a competitive environment that equated success with sustained growth, short-term bonuses weren't driving the behavior needed to meet long-term goals.
Pay for Performance, Long-Term Style
Organizations introduced long-term bonuses as early as the 1940s. These incentives shifted away from the large "gift" bonuses of the 1920s that were piled on top of high salaries. Rather, the new bonus structure paid out bonuses in three to five years, and only when specific long-term goals, such as increased revenue, were realized. These incentives were designed to help employees see beyond immediate gratification and instead make decisions that would affect the long-term health and prosperity of the company.
Although long-term bonuses debuted in the decade following the Great Depression, their impact wasn't really felt until the 1960s, when they represented a greater share of an employee's compensation package. Typically, long-term incentives were connected to a company's profits and were paid in cash or in stock over a certain number of years. Stock options became a popular addition to the long-term incentive mix especially in the 1950s, when tax reform legislation that drove up income tax rates made stock options an attractive, and less taxable, alternative.
This tax reform caused organizations to get increasingly creative when it came to incentives. While cash was king prior to tax reform, and was viewed as the most dependable way of getting—and keeping—productive bodies in office chairs, big tax hits reduced the effect of this dangling carrot. How could organizations motivate their employees in spite of tax reform? Once again, they responded to changes in the world by changing the way they incented. Enter perquisites.
PERKS—COMPENSATION'S CAFFEINE JOLT IN THE 1950s
Perquisites, commonly known today as "perks," were introduced to compensation plans in the 1950s. Because of the tax situation described in the previous section, organizations needed to find a way to motivate employees that didn't involve money, and perks were particularly ingenious because they tapped into a significant human need—the hunger for recognition.
Excerpted from GAME THE PLAN by CHRISTOPHER W. CABRERA. Copyright © 2014 Xactly Corp.. Excerpted by permission of River Grove Books.
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