Raghunath Rao studied an overlooked type of pay incentive: activity-based.

Companies should pay workers to try rather than only to succeed.

In new research, Raghunath Rao, associate marketing professor at Texas McCombs, enlisted a pharmaceutical company to test the effects of incentivizing workers to make more sales calls. The result, he found, was a sales increase of up to 9%.

It was a simple incentive to implement, because it used information the company already had: logs of customer calls and visits made by each salesperson. The company offered rewards for meeting or exceeding certain levels of calling.

Rao says it’s an example of an overlooked type of pay incentive: activity-based. Many companies offer bonuses for hitting sales targets. But a survey by the American Management Association found that only 15% awarded them for activities, such as calling customers.

And he says incentivizing activity can work for other for-profit and nonprofit organizations, too.

“It’s not just the sales outputs, but the activity inputs,” says Rao. “Companies have been slow to recognize that the plan that works the best is a combination of the two.”

Sales-based incentives are widely popular. According to the nonprofit Incentive Research Foundation, 80% of top-performing companies use them.

The theory seems straightforward: When individuals work harder and earn more for the company, they earn more for themselves.

In practice, however, such incentives may not motivate every worker, Rao says. When teams make sales, some members do less work than others, but they typically divide the bonus equally.

To motivate such underperformers, Rao proposes an activity-based incentive. If someone’s bonus depends partly on making calls, they might make more of them.

To learn whether activity-based incentives could raise sales, Rao worked with researchers George John of the University of Minnesota, Madhu Viswanathan of the Indian School of Business, and Sunil Kishore of McKinsey & Company.

They recruited a South Asian pharmaceutical company to run a three-year experiment on one division, with 305 sales territories, 412 salespeople, and 71 supervisors.

“We used the company as a laboratory,” Rao says.

The experiment began with a traditional bonus plan based on sales quotas. In the next phase, it added a second, smaller bonus based on activities such as visits to physicians and pharmacies. In the final phase, it returned to its traditional plan, to see whether sales would decline without the activity bonus.

The researchers’ hunch proved correct. During the middle phase, when activity bonuses were offered, sales were up to 9% higher.

The reason was that less-productive employees started working harder, Rao says.

Rao also looked at a second question: Who should get activity-based incentives? Should they go to salespeople and their supervisors, or just to supervisors?

To find out, his experiment separated the two groups. During one period, both got activity bonuses. In the next period, only supervisors got them — based on the numbers of calls their salespeople made.

It made more economic sense, Rao found, to award activity bonuses only to supervisors and not to salespeople:

· When only supervisors got bonuses, profits were 3% higher. In part, that was because it cost less to pay the supervisors, who made up only 18% of the bonus pool.

· Supervisors also managed their salespeople more closely, resulting in 7.6% more calls than when they had no incentives.

“Supervisors were monitoring their salespeople’s activities and suggesting what activities to undertake,” he says. “They had more experience and a better stock of wisdom about what works in the field and what does not.”

The results were so compelling, Rao reports, that the pharmaceutical company plans to implement activity-based incentives across more divisions.

Similar incentives could work at a wide variety of other companies, he suggests: ones where salespeople work remotely. They generate activity records, such as call logs, because supervisors can’t directly monitor all their activities.

“These findings are not as relevant to call centers, where you can clearly observe all the activities people are engaged in,” he says.

Sales calls are not the only kind of activity on which to base bonuses, he adds. Different industries might count different kinds of tasks. An enterprise software company, which sells services to entire organizations, might measure proposals sent out rather than calls made.

Such incentives might also work outside of sales, he suggests. In some schools, teachers get rewarded for a different kind of output: student test scores. To lessen the risk that they’ll focus too much on test preparation, supervisors might add rewards for certain activities, like teaching critical thinking skills.

The key is to use activities a company already tracks. “You’re not creating a whole new reporting system,” Rao says. “You’ve collected that data. Now, you translate it into an incentive package.”

“Do Activity-Based Incentive Plans Work? Evidence from a Large-Scale Field Intervention” is forthcoming, online in advance in the Journal of Marketing Research.

Story by Steve Brooks