"Monetary Incentives andSalesmen Performance"

Pradeep K. TyagiCarl E. Block

This paper examines the process of the influence of mone­tary compensation on salesperson motivation. A comprehen­sive model is presented to describe how the effectiveness ofmonetary incentives can be increased to induce salespersonmotivation and performance .

Traditionally, sales executives have insisted that mon­etary incentive is the key factor in influencing salesper­son motivation and performance [20, 21,33]. This posi­tion is essentially based on their assumptions about themotivating role of money, industry norms, and an assort­ment of "principles" they inherit from their predeces­sors [49]. McClelland [35] has noted the following rea­sons why managers have traditionally viewed monetaryincentives as a major tool for motivating subordinates .First, money has been regarded as one of a class of"attention getters." Second, since most managers arehighly achievement-oriented, they use money as a"yardstick" to equate money with achievement andwork motivation. For them, the more money offered toan employee the harder he will work. Finally, managerskeep coming back to money as a way of motivating

Address correspondence to: Professor Pradeep K. Tyagi, Department ofMarketing, College of Business, San Diego State University, San Diego, CA92182 USA.

Industrial Marketing Management 12, 263-269 (1983)© Elsevier Science Publishing Co., Inc., 198352 Vanderbilt Ave., New York, New York 10017

employees because it is the one thing they can easilymanipulate. Most monetary incentive plans can be easilymanipulated as compared to psychological factors. Un­fortunately, researchers have done very little to clarifythe relationships between monetary variables and sales­person motivation and thus support or disprove the ' 'con­ventional wisdom" of sales executives. What is neededis a systematic and comprehensive framework to identifythe process through which monetary variables affectsalesperson motivation.

The intent of this paper is to provide a comprehensiveframework for understanding the precise relationshipsbetween monetary compensation and salesperson moti­vation. A comprehensive model of the relationships be­tween monetary compensation and salesperson moti­vation and performance is proposed. Theoretical andempirical inputs from organizational psychology andother behavioral disciplines are used to provide the foun­dation for this model. The implications of the model arediscussed from a managerial perspective.

THE MODEL: MONEY AS THE DETERMINANTOF SALESPERSON WORK MOTIVATION

The model describing the process through which mon­etary rewards influence salesperson motivation is out-

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0019-8501/83 /$03.00

PAY SECRECY PERCEPTIONSVALENCE OF

VS. OFMONEY

OPENNESS EQUITY I INEQUITY

(E)x(IXV) PERFORMANCE FINANCIAL MONETARY

MONEY CAUSED BY v-.....~

.. SATISFACTiON ANDCOMPENSATION

r

MOTIVATION MONEY MOTIVATION DISSATISFACTION

j J

FIGURE 1. Money as the antecedent of salespersonmotivation and performance.

lined in Figure I . The components of this model and thenature of interactions between them are discussed in thefollowing paragraphs.

The Motivation Component

Expectancy theory [13, 28, 49] defines the motivationon the basis of three major components: expectancy,instrumentality , and valence.

Where:

Expectancy (E) is the individual's belief that his/her effortswill lead to certain level of performance .

Instrumentality (I) is the individual's belief that a certainlevel of performance will lead to certain desirableoutcomes.

Valence (V) is the importance of various outcomes obtaina­ble as a result of a certain level of performance.

In expectancy theory of motivation, money has beenregarded as an ••instrument ' l to obtain other desiredoutcomes [49J. According to this view l the importance of

PRADEEP K. TYAGI is Associate Professor of Marketing , SanDiego State University.

CARL E. BLOCK is professor of Marketing , University ofMissour i, Columbia.

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money becomes important when it is perceived as lead­ing to other desired outcomes. For example, if money isperceived by a salesperson as instrumental in achievingsecurity, and if security is desirable , money will acquireimportance. At a given point in time, money may beconsidered instrumental in obtaining a host of outcomes,such as status, security , and respect among fellow work­ers. Thus, the importance of money to an individualsalesperson is a function of the importance of all thoseoutcomes which he or she perceives to be dependentupon money and the belief that money will lead to theirattainment. Likewise , in other theoretical orientations(e.g. , need and drive theories) , money has been treatedessentially as a neutral stimulus that in time takes onvalue because of its association with other outcomes [22,24]. The desire for outcomes that can be satisfied throughmoney must be present in order for money to work as aneffective motivator [36]. Such outcomes may includebuying a new home, a more secure retirement , and anexciting vacation .POSITIVE AND NEGATIVE OUTCOMES. In examining themotivational role of money l both positive and negativeoutcomes must be considered. Positive outcomes arethose that enhance the salesperson's feeling of satisfac­tion, while negative outcomes reduce the feeling of satis­faction [29J. Examples of positive outcomes are respectfrom peers and job security, negative outcomes includesuch factors as boredom and job insecurity.

A monetary incentive may be highly valued, and jobperformance may be viewed as leading to it, but ifnegative outcomes such as feelings of emotional stress orbeing shunned by one's peers are also perceived as beingrelated to performance, there may be little motivation toperform. This is a major point in expectancy theory,which maintains that when negative consequences are

motivated by their compensation. The same study alsoreported that in a group of organizations where pay wastied to performance, employees expressed the belief thattheir pay was related to performance.

In Figure 1, the link between performance and mone­tary rewards is drawn as a wavy line to indicate theconditional influence of the performance-reward rela-

A Framework for seeing the role of money.

perceived to result from performance, the motivationaleffect of positive outcomes may be cancelled out orreduced [49]. In order to be effective, a compensationprogram must create conditions in which a large numberof positive outcomes are perceived to be tied to perfor­mance, with few or no negative outcomes being antici­pated. In a personal selling situation, interdepartmentalconflict, job pressure, and conflicting authority may can­cel out the positive increase in salesperson motivationtied to financial rewards.

The Performance-Reward Relationship andMotivation

As shown in Figure 1, the link between salespersonperformance and financial compensation influences mo­tivation. When a salesperson's rewards are dependentupon his performance, his belief that good job perfor­mance leads to greater monetary rewards will growstronger. Consequently, monetary compensation will bea motivating factor when it is explicitly based on perfor­mance. This view has been supported both theoreticallyand empirically in industrial psychology studies [23, 31].Lawler [29] argued that for a pay plan to motivate em­ployees it must create a belief among them that goodperformance will lead to high pay, by making such arelationship as visible as possible. To quote Lawler [29]:

Failure to tie pay closely to performance in many com­panies could mean that pay is not motivating job perfor­mance. In order for pay to motivate performance, it mustappear to be related to performance; and employees are notlikely to believe that pay is related to performance if itactually is not.

Lawler [27], has shown that in one instance whereearnings were not based on performance, employeeswere in fact aware of this and, consequently, were not

tionship on an individual salesperson's motivation. Asalesperson will only be motivated when financial incen­tives are clearly and visibly based on his performance.

In a situation where good performers are rewarded thesame as poor performers, the perceived relationship be­tween monetary rewards and performance is likely to beweak. Monetary rewards, as a result, will become lesseffective in inducing motivation. In order to show arelationship between monetary rewards and perfor­mance, each salesperson's pay should be divided intothree parts. One part should be for the job the employeeis doing, i.e., everyone who holds a similar job wouldget the same amount. A second part of the pay should bedetermined by seniority and cost of living factors andshould be extended to every employee. The third part ofthe pay however, should not be automatic. It should beindividualized so that the amount paid would be basedupon each person's performance during the immediatelypreceding period. Accordingly, salespersons who arepoor performers should find that this part of their pack­age is minimal, while good performers should find thatthis part of their pay is significantly greater and reflectsimproved performance [29]. Such a pay system wouldensure a clear link between performance and financialincentives.

Monetary Satisfaction and Motivation

The ability of monetary rewards to motivate a sales­person also depends on his current level of satisfactionwith money. In the psychological literature, the term"satisfaction" has been defined as the difference be­tween what one wants and what one receives. If a sales­person's compensation is more than he has aimed for, heis considered satisfied. His satisfaction decreases whenhe makes less money than he has aimed for.

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It has been argued that the more satisfied a person iswith his monetary compensation, the less effective addi­tional financial incentives will be in increasing his moti­vation. One study found that a high level of monetarysatisfaction among managers was indeed associated withadditional financial rewards being less important to them[3]. Another study [15] reported a situation where man­agement unintentionally created a pay scheme underwhich a group of salespersons were paid so highly thattheir pay became relatively less important to them. Con­sequently, salespersons started searching for more satis­fying jobs even though these new jobs paid less well.Management then intentionally cut back the level of theircommissions so as to keep them slightly "hungry."Similarly, Ganguli [14], in an experiment involvingworkers in an Indian engineering firm showed that themore pay an individual received, the less important paywas to him.

In a similar vein, a theoretical model proposed byMarch and Simon [35], suggested that the existence of astate of dissatisfaction is a necessary, but not sufficient,condition in order for money to act as a motivator. It isnecessary, because dissatisfaction of some sort is as­sumed to be required to activate the organism towardperformance behavior. It is not sufficient, however, be­cause a dissatisfied employee may not perceive monetaryrewards as leading to satisfaction. A motivation modelproposed by Porter and Lawler [42], also suggests anegative relationship between an individual's satisfactionlevel and the value of monetary rewards as perceived byhim. These suggestions are consistent with the conten­tion made by need and drive theories that once an indi­vidual's financial needs are satisfied, monetary incen­tives become relatively less important to him, and thatthe individual then proceeds to fulfill other categories of

needs. Figure 2 summarizes the essential thrust of theabove arguments.

It should not be inferred that when a salesperson ishighly paid, financial incentives are unimportant to him.Rather, the above argument implies that financial incen­tives are likely to be less important to him as compared tosomeone who is paid less well.

Secret Versus Open Pay Policies

Secret pay policies are used more frequently to com­pensate employees than open pay policies [29]. Researchevidence suggests that pay secrecy may reduce the abilityof monetary compensation to motivate salespersons be­cause secrecy makes accurate performance-reward com­parisons difficult [11, 12, 26, 27]. Research on paysecrecy shows that when compensation schemes are keptsecret, employees tend to perceive the earnings of otheremployees incorrectly. There is a general tendency foremployees to over-estimate the pay of their peers. In arecent study, Lawler [30] showed that in one organiza­tion which followed a secret pay policy, the average raisegiven was 6%, while the employees believed that it was8%. The larger their raises were, the larger they believedother people's raises were. Lawler found that regardlessof how well an individual employee was compensated,he felt that he was getting less than the average raise.This was particularly true of good performers, who didnot believe that their compensation was based on theirperformance. Ironically, however, the pay schemes werebased on performance; the employees studied were notmotivated by pay because they did not believe that re­wards were based upon performance.

In his original work on motivation, Vroom [49] arguedthat accurate feedback of the quality of work is a strongstimulus to good performance. Employees perform better

HIGH LEVEL OF ~ HIGH LEVEL OF . LOWER IMPORTANCEMONETARY REWARDS - MONETARY SATISFACTION ATTACHED TO MONEY

r

LOWER MOTIVATIONRESULTING FROM

MONEY

FIGURE 2. Relationship between monetary satisfac­tion and motivation.

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when they receive feedback as to how well or poorly theyare doing in comparison with some meaningful standard.For a salesperson, financial incentives may provide sucha feedback. Larger financial incentives may be perceivedto be related to good performances and lower incentivesmay be viewed as indicators of inferior performance.

ployee, when he said, "I don't like to do it, but I can'thelp but look at other employees' houses, cars, andthings and wonder if they are making more money than Ido. " Lawler [27] found that the more an individualoverestimated his peers' pay, the less satisfied he waswith his own salary.

Secret pay policies are used morefrequently to compensate employees than

open pay policies.

But, if secret financial incentive schemes are used, sales­persons may not be able to correctly evaluate their payand its reflection on their performance. Since under asecret compensation system an individual may tend tounderestimate his pay compared to that of his peers, asalesperson may perceive his performance to be inferior[30]. Such misperceptions may suggest that the salesper­son should improve his performance but does not giveany indication as to how he should do so. Thus, confu­sion resulting from secret compensation schemes mayaffect salesperson motivation adversely.

A point of caution is that disclosure of compensationschemes will only be effective in motivating salespersonswhen compensation is actually tied to performance orbased on merit. As Lawler [29J has argued, making acompensation scheme public where pay is not tied toperformance will only serve to emphasize more dramat­ically that it is not, thereby further reducing its power tomotivate.

Perceptions or Pay Equity vs, Pay Inequity andSatisfaction

Salespersons' perception of compensation as beingequitable or inequitable can also influence their satisfac­tion with financial incentives. Such perceptions partiallydepend upon whether the organization is using secret oropen pay policies. Executives in organizations that usesecret pay policies argue that secrecy of pay schemeshelps to reduce unfavorable pay comparisons. However,Andrews and Henry [4J showed that employees do, in­deed, make such comparisons. In doing so, employeesoften rely on indirect and vague information. This pointwas illustrated quite well in an interview with an em-

Dissatisfaction resulting from perceived inequity offinancial compensation may also be explained on thebasis of equity theory. Adams [2J has argued that em­ployees frequently make the following comparisons be­tween themselves and others.

My Compensation compared to His/her (their) CompensationMy Performance His/her (their) Performance

Feelings of inequity occur when an individual feelsthat the ratio of his compensation to his performance isless than the ratio of others' compensation to their perfor­mance. Such perceptions, in tum, lead to a sense ofrelative deprivation and dissatisfaction.

A number of empirical studies have supported theabove position. Lawler and Porter [31] for example,found a general tendency among the better paid managersat each management level to be the most satisfied em­ployees. These managers perceived that their pay com­pared favorably with that of other managers makingsimilar contributions. Similarly, Sayles [45] examined asituation in which the same wages were paid to bothskilled employees and relatively unskilled workers. Ahigh degree of dissatisfaction was found to exist amongskilled employees, because when they compared theirpay to that of unskilled workers, they felt relativelyunderpaid. They perceived an inequitable compensa­tion-performance ratio. The data from other studies [4,41] have also supported the argument of the negativeeffect of perceived inequity on satisfaction level.

Conclusions and Implications

The role of financial compensation in influencingsalesperson motivation remains one of the most impor-

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tant issues but one of the least researched. We believethat the model presented here will provide a basis forclarifying this issue. Many variables, traditionally con­sidered independently in the sales management literatureare linked together in the model, and interactions amongthese variables have been identified. Additional variablesnot previously considered in sales management, but dis­cussed in behavioral science research on motivation,have also been incorporated in the proposed model.

The present study should be particularly interestingbecause the proposed model suggests a number of specif­ic and immediately useful implications for practice.

1. If money is to be used as the primary motivator,sales supervisors should attempt to create a psycho­logical climate in which salespersons perceivemoney as leading to desirable outcomes. At thesame time, the possible occurrence of undesirablefactors, which may be associated with the job ororganizational climate, should be avoided in orderto facilitate the positive motivational influence ofmoney.

2. Monetary compensation, in full or in part, shouldbe closely tied to salespersons' performance, andthe relationship should be made as explicit aspossible.

3. Money is not an effective motivator if salespersonshave too much of it. Salespersons, therefore,should not be consistently paid very highly if mon­ey is to be used as the major tool of motivation.

4. Salespersons often make comparisons of their com­pensation/performance ratio with those of theirpeers. Secret pay policies contribute to perceivedimbalance in these ratios and thus to dissatisfactioncaused by perceived inequities. Organizationswould be better off by designing open compensa­tion schemes and, therefore, avoiding feelings ofinequities.

5. Pay schemes should be made public only if pay (ora part of the total pay) is actually tied to perfor­mance. However, if the pay-performance relation­ship cannot be clearly demonstrated, the organiza­tion may be better off by keeping p.ay schemessecret.

6. Instead of considering motivation as a single vari­able, sales executives should view it as a processwhere different beliefs (i.e., whether efforts willlead to performance, whether performance will berewarded, how attractive are the rewards offered)interact together to form salesperson motivation.

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It should be clear from the above discussion that notone pay plan presents a panacea for a company's sales­person motivation problems because a number of vari­ables operate to make the money motivation processcomplex. The above implications based on the proposedmodel should be helpful in designing more motivationalcompensation strategies for salespersons.

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