Organizations who reward successes and exact negative consequences for wrong behavior are said to use a “carrot & stick” approach. The carrot is the reward, and the stick is the negative consequence.
A rather amusing example of this carrot and stick approach was illustrated in the movie, “Glen Garry, Glen Ross”. Alec Baldwin plays an aggressive sales manager who gives a motivational speech to his beleaguered sales team played by: Jack Lemon, Ed Harris, Alan Arkin & Kevin Spacey. The sales manager proudly announces a sales contest. First prize is a Cadillac Eldorado, second prize is a set of steak knives, and third prize is, “you’re fired”. (Glen Garry Glen Ross - Video Clip)
The carrot is the Cadillac Eldorado, and the stick is being fired. Clearly, this is a misuse of the carrot and the stick approach. Why? Because you are pitting your people against each other in a winner-take-all contest. Regardless of how well all the salesmen perform in this scenario, the one who sells the least will lose his job. Throughout the movie of Glen Garry Glen Ross, you see massive corruption with salesmen bribing the sales manager or stealing the good leads to save their job.
The opposite of this behavior is just as damaging. Modern-day managers have succumbed to an “only be nice” leadership style. Managers have been so demonized in our modern society that they are reluctant to ever use the “stick”. Instead, they promise rewards for great performance only. Why not? It’s much easier for them… they don’t have to be the bad guy. Plus, not getting a reward is like a “stick” anyway. Right?
I am a strong advocate of the “carrot & stick” approach; when used properly; and I’ll tell you why.
It’s not so much about rewarding success and creating a competitive environment as it is about clearly communicating expectations.
Salesperson Example
One of the most rewarded or penalized professions is sales. Sales drives the revenue of a business. Without revenue and customers nothing else matters. Therefore, salespeople are often paid salaries that are less than desirable with commissions to pay for sales performance. I want to highlight three salespeople. Jane gets paid straight commission of 10% for everything she sells. Joe gets paid 4% commission plus a modest $30,000 per year salary. Jim gets paid a salary of $50,000 per year. The sales quota for each salesperson is to sell $500,000 of product per year.
If Jane makes her sales quota, she will earn $50,000. If Joe makes his sales quota, he will earn $50,000 per year. Jim will get paid $50,000 per year regardless of how much he sells.
The carrot for Jane is increased sales. If Jane sells $1,000,000, she will earn $100,000. The stick for Jane is decreased sales. If Jane sells nothing, she will earn nothing and not be able to pay her bills. Jane will quite likely quit a job that pays nothing very quickly.
The carrot for Joe is modestly enticing. If he sells $1,000,000, he will earn $70,000. The stick for Joe is settling for his base salary of $30,000. If Joe lives a modest lifestyle, he may be okay earning $30,000; or not.
There is no carrot or stick for Jim. If he sells $1,000,000 or $0, he will earn his same $50,000.
Business Owner’s Viewpoint
Let’s look at the role of Jane, Joe, and Jim from the viewpoint of the business owner. In each case, as the business owner, you rely on your salespeople making their sales quota. If they don’t, your revenue drops; your growth objectives are halted; and you must reduce your costs in some other part of your business. Regardless of the sales compensation method, you can fire any salesperson that’s not performing.
If Jane fails to meet her sales quota, you are saving a minor amount of money in sales costs; but you still must cut back; and you must replace Jane to regain ground in revenue.
If Joe fails to meet his sales quota, you will decide sooner to fire Joe, because you know that you’re paying money for no results.
If Jim falls behind in his sales quota, you’ll immediately fire Jim; and find someone else who will get you the results you need.
Regardless of the salesperson and their compensation level, there will be negative consequences beyond diminished compensation.
Employer/Employee Reality
I want to take a quick detour in this post; and quickly explain the differences of an employer, employee and salesperson.
The Employer
The reason that a person starts their own business is because they want to do much better financially than they could as an employee. In exchange for this reward, employers are willing to take on more risk.
The Employee
Employees want to earn enough money to pay their bills, put some savings in the bank for retirement, take their family on a grand vacation once a year, and work reasonable hours.
Salespeople
Salespeople are a slightly different breed. They want to earn more than average and will put in the work to do that; but they do not want to take the same level of risk as a business owner. Otherwise, they’d start their own business.
Emotion and Performance
In the context of the Employer/Employee reality, it is important to understand the emotional reaction that Jane, Joe, and Jim will have in their role as salesperson.
Jane will feel stressed and under time pressure to close a sale. If your business has low priced goods with short sales cycles; this can be a positive emotion that is consistent with your company’s sales goals. If, on the other hand, your sales cycles take time, this emotion will breed deceit and create undue pressure on new salespeople to cheat your customers in order to earn a living.
Joe has options. On one hand, he can learn to live at a lower income level and get enough sales to keep from being fired. Or, he can take his time to develop deeper customer relationships for larger sales. Or, he will feel like he is under pressure to sell because his base salary is less that what he needs for basic living expenses.
Jim feels little pressure to sell. That doesn’t mean he won’t get results. If Jim feels like he’s working harder than his fixed salary warrants, he may ask for a raise. Employees hate asking for a raise.
The Moral of the Salesperson Story
In our salesperson story, you clearly see that Jane has the biggest carrot and biggest stick. Joe has a modest carrot and stick. Jim has no carrot or stick.
Remember when I said that the “carrot & stick” approach is about “communicating expectations”?
Jane clearly understands expectations. She feels the need to perform… “or else!” This is the same pressure that your company feels. If Jane fails to sell, the company will feel the pain of laying people off or going out of business. Likewise, if Jane exceeds her sales quota, the company will exceed its growth and profit objectives.
Jim is hearing a different message. Jim is told that he has a sales quota, but he will not feel any pain if he doesn’t make his quota; nor will Jim feel any better if he exceeds his quota. Jim is being told that the less effort he puts in without being fired, the greater value his fixed compensation will be.
Joe is being given a safety net but must sell his quota to live in a way he wants. If he exceeds his quota, he will be able to improve his savings or reward himself in some way.
The more aligned the “carrot and stick” is with your company’s objectives, the less you will have to communicate your company’s objectives to your employees. As far as sales commission payment plans go, they must match your selling marketplace.
What about Non-Sales Positions?
There are commission-based positions, tip-based positions (like food servers), hourly workers with overtime, fixed salary positions, and earned bonus positions. Most compensation plans are based on the industry. However, I strongly recommend that you pay your people in a way that is consistent with your company’s objectives while also providing the financial security they need.
If you’re struggling with turnover, you may consider a carrot of delayed bonus compensation.
If you need to increase productivity, reward employees for achieving production quotas.
If you need higher skilled employees, use qualification metrics, and set compensation levels accordingly.
There are literally hundreds of ways to pay people with just as many carrots and sticks.
Caveat
It’s important to note that no matter what compensation system you create, there's no substitute for hiring the right people and paying them what they are truly worth. In his book “Good to Great”, Jim Collins found that bonus programs were not a substantial factor in determining the success of a company. However, paying skilled professionals what they are worth was a determining factor of company success. Here are recipes for success with a carrot & stick approach:
A great bonus program with the wrong employees is a waste of your time.
Rewarding poor employees, the same as your great employees is a recipe for disaster.
Use the carrot and stick approach to clarify expectations; not to create rivalry.
Create bonus compensation that is clear, simple, and consistent with company goals.
Ensure group bonus systems are not rewarding poor individual performers.
Always follow through with bonus payments as promised.
Clearly communicate expectations, rewards, and consequences.
I hope that you’ve learned a little bit about using the carrot and stick approach to grow your business. When you get this right, you create a positive culture where your employees clearly understand expectations; and are rewarded when they help your company achieve its objectives.
If you’d like to learn more about how I coach my business owner clients, please visit my website at www.mmbizcoach.com.