Do variable compensation plans damage salesperson health?
First-of-its-kind research examines variable compensation plans and their often-ignored health impact on sales professionals
There are fewer management techniques more common across the global business world than variable compensation for sale professionals. One can find these models in place in just about every industry and geography. Indeed, in the U.S. alone, variable compensation accounts for over 40% of sales income. As most people know, variable compensation is the “at risk” part of salesperson’s income. For example, if a salesperson has a target salary of $100K and a 20% variable compensation rate, $80K is paid out on a fixed schedule and the remaining $20K is paid only if certain sales targets are met.
Now, there is a reason that variable compensation is so common around the world, and it is that it works. The belief that variable pay increases sales performance is supported by both academic research and real-world experience across industries. Interestingly, researchers have for the most part avoided the question of variable compensation’s negative effects until recently. It’s an important question, though: is variable pay only good, or does it come with a cost?
The answer may be that there is a cost, and it may be much higher than generally thought. Indeed, Johannes Habel (Houston), Sascha Alavi (Ruhr-Universität Bochum), and Kim Linsenmayer (Ruhr-Universität Bochum), recently published the results of new research that gives us an initial view the negative health consequences of variable pay systems. As a framework for the study, the authors adopted something called the Conservation of Resources (COR) model. COR theory was developed in the 1990s and argues that people possess certain resources which they continuously deplete and restore in the course of daily life. Resources come from four categories: objects (e.g., house, phone), conditions (e.g., stable employment, good health), personal traits, (e.g., optimism, hope), and energies (e.g., knowledge).
According to COR theory, stress arises when someone’s personal resources are threatened, depleted or when investments in new resources do not work out. COR theory, moreover, has three further principles relevant to an analysis of the impacts of variable pay:
The loss of resources is felt more than an equivalent gain.
Individuals must invest in resources in order to prevent and restore resource loss, as well as acquire new resources.
A loss spiral can be caused by a rapid depletion of resources and vice-versa for a gain cycle that replenishes resources for future use.
With COR theory in mind, the authors examined the impact of variable compensation models on people’s health using two criteria:
(1) Physician-attested sick days, which indicate that someone is consuming resources due to illness, and
(2) Emotional exhaustion, which suggests someone may be going through an extended loss cycle and depleting resources faster than they can be replenished
The authors conducted three studies, each looking at a different dimension of the issue. In the first study, they looked at a German automotive parts manufacturer that decided to move its entire sales workforce from a high variability model (80% of total pay) to a low variability model (20%). The team followed 803 sales professionals over a year to assess the changes that the model change brought about in their health profiles. It’s worth noting that in Germany “sick days are strictly regulated by law and require certification by a physician (at the latest on the third day of the leave).” Therefore, salespeople with more than three sick days in a given month in this study are “likely to have substantial health problems.”
After a year and almost 10,000 observations, the authors found that the sales impact of the move to lower variable pay was negative (as expected) but that the reduction in sick days offset approximately 20% of the total negative effect. In other words, lower variable pay made the company less healthy (lower sales) but employees healthier (fewer sick days). The improvement in employee health was not evenly distributed. The authors found that salespeople who are more susceptible to stress experienced the greatest health benefits.
Extrapolating from their data, the authors conclude that in the opposite scenario:
Companies can increase salespeople’s performance by increasing variable compensation share, but this increase comes at the expense of deteriorated health (more sick days). Furthermore, sick days reduce sales performance, to such an extent that they offset the direct, positive performance effects of increasing the variable compensation share. These findings link previously disconnected research contributions regarding the performance effects and health effects of incentives and suggest their close interaction.
In their follow up study, the authors analyzed sales performance data from 360 professionals across a variety of industries (e.g., 21% retail, 11% health care systems, 9% financial services, etc.), with a more or less equal gender distribution, and an age of the respondents of 36.6 years. “There was significant heterogeneity in the compensation system design and variable compensation share across salespeople,” note the authors, “such that their variable compensation includes bonuses and commissions tied to target achievement based on sales volume, sales revenue, or profit.”
The authors surveyed the salespeople’s past sales performance volatility (in addition to overall sales performance) and examined its relationship to stress levels, as measured by emotional exhaustion. Overall, the researchers found that higher levels of volatility, regardless of sales achieved, were indeed positively related to higher stress levels. Thus, the authors conclude that “higher levels of performance volatility may exacerbate the harmful indirect effect of variable compensation share on sales performance through elevated emotional exhaustion.” Furthermore, “at a variable compensation share as well as prior sales performance volatility of one standard deviation above the mean, variable compensation share exhibits a marginally significant negative indirect effect on sales performance through emotional exhaustion.” Put simply, when sales volatility is high enough, it completely erases the generally positive effect of variable compensation models [emphasis mine].
Overall, note the authors, “Study 2 confirms that the variable compensation share induces a trade-off between salespeople’s health and sales performance.”
In their third study, the researchers surveyed 185 salespeople from an international B2B company in the construction sector. They were almost all men (95%), with about 9 years of average experience, working in models where about 33% of their pay is at-risk. The group was global, working in 43 countries, including the United States (22); Brazil, Chile, and Germany (each with 13); and a range of other countries (with fewer than 10 each). The goal of this study was to understand to what degree aspects of their roles moderated variable comp-related stress. Aspects analyzed included experience, team identification, the quality of their relationship with their manager, etc.
The authors found that there was little benefit to having moderating effects in salespeople’s jobs at low levels of variable compensation. However, this condition changes as variable compensation levels increase. As pay risk levels increase, mental exhaustion increases and mental and social resources increasingly come into play. Certain conditions make this need more significant, especially lack of experience, low levels of team identification, and a poor working relationship with a manager. In the cases analyzed, the more the variable compensation level increases, the more it becomes a negative, not positive, sales driver.
In wrapping up their findings, the authors conclude that while variable compensation schemes generally have positive effects, they can also have serious negative consequences on employee health, especially with younger and less-connected salespeople. These negative effects can, in certain situations, be significant enough to reduce or even eliminate the positive aspects of variable compensation models. In response to their findings, the authors make two sets of recommendations:
If a company’s variable compensation share is high, managers should carefully screen salespeople and sales supervisors before hiring them. For example, while interviewing salespeople and reviewing references, managers might probe the stability of their past performance, their experience, and their tendency to build relationships with leaders and peers. If these resources are lacking or unobservable (e.g., for first-time employees), managers might screen for other stress-related resources, such as strong personal resilience or social networks. When hiring sales supervisors, managers also should screen for these applicants’ willingness to help salespeople cope with stress and the ability to build strong relationships with and among team members.
Among existing staff, first, managers should help salespeople build their job-related resources. For example, by encouraging salespeople to manage their sales pipeline for a steady stream of sales, managers can help them reduce performance volatility. With regard to social resources, companies should train supervisors to adopt leadership techniques related to relationship and community building and encourage supportive networks among salespeople, such as through team-building events. Second, if legally and culturally possible, managers could personalize incentive schemes. They could assign a high variable compensation share to salespeople with high job-related resources who prefer extrinsic rewards but limit this share for more stress-vulnerable salespeople.
In all cases, they further note, “companies concerned with their salespeople’s stress and health should sensitize their managers to the health-harming effects of their compensation decisions.” Indeed, in a fourth follow-up study, the authors found that “participants chose lower variable compensation shares if they were made aware of the stress induced by their decisions.” In other words, the more sales professionals understand the negative health implications of high at-risk comp models, the more willing they are to accept lower pay in return for lower stress.
This study is the first ever to look specifically at the relationship between variable compensation models and stress, emotional exhaustion, and sick days among salespeople. It suggests a wide variety of future research, for example:
How do variable compensation plans affect stress, health, and productivity in the long term? Do different sales force incentives moderate these effects differently (e.g., bonuses vs. commissions, all-or-nothing vs. proportional payment, monetary vs. nonmonetary incentives)? How do team incentives affect salespeople’s stress? Research could also consider how framing of compensation plans influences stress responses (e.g., $100,000 with 20% variable pay vs. $80,000 with an opportunity for a $20,000 bonus).”
As a former consulting partner, I can anecdotally attest to the stress levels that come from high-value, high-risk variable compensation plans. Indeed, I have seen more than one senior leader debilitated mentally and physically in these scenarios. It is an issue most salespeople either avoid, joke about, or deal with outside of work. Hopefully, this team’s line of inquiry will be picked up by others. Indeed, as the importance of workplace mental health issues increases worldwide, one hopes salespeople will also benefit from greater awareness of the issue and a more comprehensive research focus on how it affects them specifically.
Habel J, Alavi S, Linsenmayer K. Variable Compensation and Salesperson Health. Journal of Marketing. 2021;85(3):130-149. doi:10.1177/0022242921993195