The impact of performance targets on behaviour: a close ...

1 The impact of performance targets on behaviour: a close look at sales force contexts Research executive summaries series Vol 5, Issue 5. Dr Monica Franco-Santos Prof Mike Bourne Centre of Business performance Centre of Business performance Cranfield School of Management Cranfield School of Management ISSN 1744 - 7038 (online). ISSN 1744 - 702X (print). Research executive summaries series The impact of performance targets on behaviour: a close look at sales force contexts 1. Overview detail and provides a framework to support organisations When we think about the impact of performance in the target setting process The target setting wheel'. targets on behaviour the words high but achievable' 2. Objectives immediately spring to mind. We need to set targets at There is a great amount of research looking at the a high level to stretch staff, but the targets need to be impact of performance targets ; however, there are still perceived as achievable if the staff are going to accept many gaps that require further investigation if we want the stretch.

2 However, in real life the world is much more to inform managerial practice. The purpose of this study complex than this. is to investigate three of these research gaps: At present, most organisations use performance targets 1. The impact of sales performance targets in to influence the behaviour of their employees. The relationship with sales forces' incentive pay plans and results these organisations obtain are not always the performance measures. ones expected. There is often disquiet about whether 2. The key issues associated with target setting performance targets have the right impact on people's processes. behaviour and organisational performance . This issue 3. The effect of a set of organisational factors (role makes managers question the true value of performance clarity, managerial and peer support, time targets as a motivational technique.)

3 For this reason, it is availability, organisational cultural risk values, important that the purpose and effects of performance participation in target setting and work discretion) targets are reviewed in order to address the problems on sales people's perception of the level of difficulty that management professionals are encountering. of their targets . This study reviews existing literature on target setting The first two objectives have been addressed using case and undertakes four detailed case studies and a survey study research. The third objective has been addressed of 95 sales representatives to better understand using survey research. the factors that affect managerial behaviour. The sales function was chosen, as it is known that in this 3. Findings environment performance targets are widely used.

4 The performance targets have been defined as the objects findings are as follows. or aims of managerial action' or as borderlines that To be of practical value, performance targets have differentiate success from failure'. They are one of to be set within a wider framework of the the most commonly used motivational tools in the organisation's performance measurement and corporate world. Nevertheless, little consensus exists incentive system. regarding the true effects of performance targets on There are ten common issues associated with people's behaviour and performance . the target setting process that undermine its Some researchers stress the fact that performance effectiveness. These range from issues with the targets are key mechanisms for improving motivation data being used to set targets , through to the and organisational performance .

5 Other researchers suitability of targets used and the way in suggest that the use of performance targets can which targets are communicated and agreed with be detrimental for organisations as they generate sales people. stressful work environments, a low trust culture, data There are three factors that have an impact on the manipulation and financial performance losses. This lack way sales people perceive target difficulty: of agreement is a hurdle for managers as it does not 1. Having a clear idea of what their role and provide clear guidance about what to expect from the performance expectations are. use of this managerial tool. 2. Having a supportive organisation where In order to shed some light into the issues associated risk-taking, continuous learning and improvement with performance targets and their impact on are encouraged to promote greater ownership managerial behaviour and performance this study of the targets , which in turn positively affects focuses on: the interrelations between performance perceptions about how difficult these targets are.

6 targets , performance measures and incentive pay; key issues associated with the target setting process; and 3. Being able to participate in the target setting the factors that influence people's perceptions about the process. difficulty of their targets . The findings are presented as The research explores each of these findings in more follows. Research executive summary | 2. Research executive summaries series The impact of performance targets on behaviour: a close look at sales force contexts The interrelation between performance targets , established as incentive pay for their sales people incentive pay and performance measures (normally calculated as a percentage of salary) When looking at the effects of performance targets on should take into account internal equity levels and behaviour it is important to focus on the way in which be in line with the incentive size that is typically used incentive pay is associated with the targets and on the by peer companies.

7 It should also consider how much characteristics of the performance measures for which influence sales people have over sales performance targets are being set. The study finds that performance results. The higher the influence the larger the targets , incentive plans and performance measures cannot potential size of the incentive. be considered in isolation as they are highly interrelated. Payout frequency - the frequency of payout to sales The study shows the factors associated with sales people should be in line with the sales processes and incentive systems, performance measures and targets that strategic planning. have the greatest effect on people's behaviour. Incentive system Eligibility performance Incentive size measures Payout frequency performance payout Controllability performance targets relationship Informativeness Focus Alignment Objectivity Achievability Quantity People's Completeness, agreement and reliability performance behaviour Clarity, review and fairness Communication Recognition plans Base pay structure Training/coaching Leadership Figure 1.

8 Key factors affecting people's behaviour performance A brief description of each factor is provided below. development plans Factors associated with the incentive system performance -payout relationship - the way incentive performance targets can be used alone but in sales payments are calculated and how they vary with environments they are typically linked to incentive plans. measured performance needs to be aligned with the When linking performance targets to incentive pay the context in which the organisation operates, as it will following aspects should carefully be considered for have different effects on behaviour. avoiding unexpected behaviours : Focus - the proportion of sales people's incentive Eligibility - everyone with the same role and influence pay that is linked to individual, business unit and/or over sales performance should be entitled to receive organisational performance needs to be in line sales incentive pay.

9 With the way in which sales people work and the way Incentive size - the amount of money the firm has in which sales tasks are interrelated. Research executive summary | 3. Research executive summaries series The impact of performance targets on behaviour: a close look at sales force contexts Incentives review - incentive systems need to be Controllability - the more control sales people have reviewed periodically, at least once every two over their performance measures the more effective years and every time there is a strategic change in the the measures will be. organisation, in order to keep it up-to-date and in line Informativeness - performance measures provide with market/industry practices. information to sales managers and sales people Fairness - incentive plans need to be perceived as fair about the effect of their decisions and actions.

10 It by sales people. is important that the performance measures used for Clarity - sales people need to clearly understand what compensation purposes provide relevant information they are being paid for and how. for decision making to their users. Communication - sales people need to know how Alignment - performance measures need to be their incentive system works. The more transparency aligned with strategy in order to encourage the there is with incentive information the more satisfied expected behaviours and avoid the well known topic sales people will be, which will have a direct effect on of rewarding A, while hoping for B' (Kerr, 1995). their behaviour. Objectivity - measures used for pay purposes need to Factors associated with the performance measures be perceived as objective by their users.