Fluent Essays

Managers implement control systems in order to ensure that individual goals are aligned with organizational goals (Eisenhardt 1985). This is necessary because the individual goals of employees are not always in sync with the goals of the organizations they work for. Thus, a control system is defined as “an organization’s set of procedures for monitoring, directing, evaluating, and compensating its employees” (Anderson and Oliver 1987, p.76). In other words, control systems are used to monitor and reward personnel in order to gain assurance that the personnel are working towards a common interest. Within a sales context, sales force control systems align sales force productivity and behavior with organizational priorities. Equipped with the above knowledge, you have been hired by Buffaloes, Tigers, and Volunteers (BTV) as independent consultants. BTV is a small start-up company that sells business-to-business products. Surprisingly, BTV has seen tremendous success in the past couple of years, but this is only the beginning of their ultimate potential. Part of this success has, by and large, been due to a relatively small salesforce. In order to continue their growth trajectory, the managers at BTV recognize the need to hire additional salespeople. At BTV, managers like for their salespeople to not only focus on customers, but to work diligently with other members of the organization (e.g., engineering, purchasing) in order to maximize efficiency. However, in order to ensure that the salesforce continues to meet and exceed company goals, the managers recognize that it is important to put in place a formal control system. The problem is that the managers at BTV all have engineering backgrounds and do not have the slightest clue on how to best proceed. Your task is to provide BTV (which is what they are paying you for) with your expert advice with regards to what they need to do. You will provide them with a feasible recommendation via a professional memo. Utilize the attached article by Anderson and Oliver (1987) draw on the article provided. However, only “one” solution should be provided. Perspectives on Behavior-Based versus Outcome-Based Salesforce Control Systems Author(s): Erin Anderson and Richard L. Oliver Source: Journal of Marketing, Vol. 51, No. 4 (Oct., 1987), pp. 76-88 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/1251249 Accessed: 19-09-2016 18:00 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms American Marketing Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Marketing This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms Erin Anderson & Richard L. Oliver Perspectives on Behavior-Based Versus Outcome-Based Salesforce Control Systems Forms of control systems used in salesforce evaluation and based on the monitoring of outcomes or of behaviors are described, contrasted, and evaluated in terms of emerging theories in economics, orga- nization theory, and cognitive psychology. Generally, the principles of behavior control as opposed to outcome control are found to be consistent with these theoretical perspectives with exceptions as noted, though studies of descriptive trends suggest that outcome control remains useful as a sales management philosophy. The authors conclude with a set of propositions intended to stimulate research on the man- agerial and behavioral consequences of the two control philosophies. Acontrol system is an organization's set of pro- cedures for monitoring, directing, evaluating, and compensating its employees. By accident or design, such a system influences employee behavior, ideally in a way that enhances the welfare of both the firm and the employee. One group of employees critical to the organization's functioning is the salesforce. We describe and discuss two major salesforce control sys- tems and assess the effects of these systems on the salesperson's cognitions, motivation, and behavior. Like system frameworks generally (see Eisenhardt 1985), salesforce control systems can be classified into those monitoring the final outcomes of a process and those monitoring individual stages (e.g., behaviors) in the process. In an outcome-based control system: * relatively little monitoring of salespeople by management is involved, * relatively little managerial direction or effort to direct salespeople is involved, and * straightforward objective measures of results (outcomes), rather than measures of the meth- Erin Anderson is Assistant Professor and Richard L. Oliver is Associate Professor, Department of Marketing, The Wharton School, University of Pennsylvania. The authors thank Bob Trinkle of TSI for sharing his sug- gestions and ideas. 76 / Journal of Marketing, October 1987 ods salespeople use to achieve results, are used to evaluate and compensate the salesforce. In contrast, in behavior-based control systems: * considerable monitoring of salespeople's activ- ities and results is involved, * high levels of management direction of and in- tervention in the activities of salespeople are in- volved, and * subjective and more complex methods based largely on (1) what salespeople bring to the sell- ing task (e.g., aptitude, product knowledge), (2) their activities (e.g., number of calls), and (3) their sales strategies, rather than sales out- comes, are used to evaluate and compensate the salesforce. Outcome-based control approximates a market contracting arrangement wherein salespeople are left alone to achieve results in their own way using their own strategies. Salespeople are held accountable for their results (outcomes) but not for how they achieve the results (inputs or behavior). Under such a system, the invisible hand of the marketplace pressures sales- people to perform and guides their actions. Firms us- ing outcome control systems reduce managerial over- head by capitalizing on the "direction" afforded by Journal of Marketing Vol. 51 (October 1987), 76-88. This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms market pressures, shifting risk to the salesperson (Basu et al. 1985) and sharing rewards with the salesperson in direct proportion to each individual's measurable performance. Outcome-based control, then, is laissez faire management whereby the salesperson is made an entrepreneur, responsible for his or her performance but free to select the methods of achievement. Behavior-based control systems represent an op- posing philosophy. Active managers, backed by a sig- nificant management information-gathering staff, vig- orously monitor and direct the operations of the salesforce. Managers typically have a well-defined idea of what they want salespeople to do and work to en- sure the salesforce behaves accordingly. Sales results are presumed to follow, often in the long term. To ensure cooperation, the firm pays salespeople largely on a fixed basis (salary). Thus, the firm assumes risk to gain control. Performance evaluation and increases or decreases in salary (changes in reward) are based on more complex, subjective assessments involving what salespeople know and what they do (their inputs) rather than what they measurably achieve (their out- comes). In behavior-based control systems, the visi- ble hand of management is substituted for the invis- ible hand of the market's forces. These extremes are stereotypes. Many salesforce control systems are a mix of approaches, containing elements of both behavior- and outcome-based strat- egies (see Churchill et al. 1985). Nonetheless, the preceding discussion captures the major differences in the two separate philosophies. Overview The purpose of our article is to propose a framework for selecting an appropriate salesforce control system as it affects the job-related knowledge, motivation, behavior, and sales outcomes of the salesperson. The analysis draws from economic theories of control (transaction cost analysis and agency theory), orga- nization theory, and cognitive psychology. We elab- orate current viewpoints on salesforce control, present and integrate four theoretical perspectives on this problem, discuss the findings of studies, and describe the incidence of practices used. We then present for empirical testing a series of propositions about the im- pact of control systems on the salesperson. We con- clude with implications for managerial strategy. Review of the Sales Control Literature Despite their obvious managerial importance, com- pensation plans have received little empirical attention in the salesforce management literature. Moreover, few if any comprehensive conceptual frameworks are used in practice to determine how to compensate salespeo- ple. Hence, firms follow industry norms, experiment, and use ad hoc methods to cope with the compensa- tion puzzle (John and Weitz 1984; Smyth 1968). Outcome-Based Control Historically, salesforce managers and the performance appraisal systems used by managers have tended to emphasize outcomes rather than behaviors (Churchill et al. 1985), particularly in determining compensa- tion. A major reason is the availability of simple, seemingly equitable measures of sales volume or dol- lars. Partly because of the ease with which orders usu- ally can be linked to the individual responsible for the sale, the dollar sales criterion is a popular and readily available measure; it is the single most commonly used performance index in published research reports (Weitz 1981) and is very commonly used in practice (Peck 1982). Sales unit volume is also a popular measure because of its intuitive appeal as an index of the breadth and depth of sales. Other widely used indices are gross margin, net margin (sales minus the cost of the sales- person), and the sales expense or cost/sales ratio (Behrman and Perreault 1982). These last indices in- clude profitability, which can reduce the incentive to maximize revenue (at the expense of margins) when dollar sales is the criterion. Advantages of outcome-based control. By its na- ture, selling is an independent occupation. The fact that salespeople spend considerable time on the road makes supervision difficult. Further, selling is a de- manding occupation in which success is difficult to predict. Contrary to popular belief, it is extremely dif- ficult to profile the successful salesperson and to spec- ify universal rules of thumb as to what makes one salesperson more effective than another (Weitz 1981). Because many types of individuals and many methods of operation appear to succeed in one setting and fail in another, developing situation-specific strategies is difficult. In the terminology of Ouchi and McGuire (1975), it is impossible to specify a universal "trans- formation process" by which salespeople's inputs be- come outputs (results). Knowing this, many managers prefer to let their salespeople use their own methods. Instead of actively directing the salesforce, they give a varied group of salespeople free rein and hold them accountable for the results. Given the nature of the sales job and the hetero- geneity of the sales task, outcome-based control sys- tems are the path of least resistance. These methods also provide a compelling individual motivation in that nonproducers receive no compensation. Because of the often discouraging nature of selling (e.g., rejec- tion by customers, incommensurate social status, task ambiguity due to little contact with supervisors), many Salesforce Control Systems / 77 This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms managers believe outcome-based rewards are neces- sary to maintain motivation. Disadvantages of outcome-based control. Despite their benefits, outcome-based systems have some well- known drawbacks. For example, the inherent lack of direction in such systems can permit sales behaviors that harm the organization in the long run (e.g., lack of attention to customer satisfaction, primary empha- sis on the more profitable or, alternatively, easy-to- sell items in the product line). Further, outcome-based systems tend to focus the salesperson on activities with immediate payoffs to the detriment of long-term re- sults (John and Weitz 1984; Smyth 1968). For ex- ample, salespeople may resist investing extra effort in selling new products, prospecting, penetrating large accounts (which are often more difficult to sell), and providing service. Instead, they may be motivated to pursue immediate returns by minimizing service and by selling established products to smaller, regular ac- counts (Moynahan 1983). Managers can avoid these problems by using mul- tiple indicators of outcomes (e.g., sales per product or per account category) rather than one or two simple indicators. However, the use of these indicators in- creases the complexity of the system, necessitates more record keeping, and may involve subjective judg- ments in combining separate indices into overall per- formance assessments. Adding complexity to the con- trol system necessitates a greater number of subjective judgments and more information gathering, thereby shifting the system toward the behavior-based philos- ophy. Behavior-Based Control As noted, behavior-based control systems address the process of selling rather than simply the outcome(s). Salespeople in such systems may be evaluated and compensated on any number of factors that are not themselves measures of achievement but may result in sales performance. Personableness, product knowl- edge, presentation quality, closing ability, services performed, number of active accounts, calls made, amount of correspondence, and days worked are com- mon examples (Jackson, Keith, and Schlacter 1983). Typically, salespeople are rated by managers on these variables, which then are weighted and combined into a composite evaluation upon which salary and pro- motion decisions are based.1 Disadvantages of behavior-based control. Poten- tial drawbacks to such a system are the complexity 'Patton and King (1985) find evidence that managers combine this information in a linear compensatory way, which can become a fairly complex process if more than a few variables are used. and subjectivity of evaluation (Adkins 1979; Cocan- ougher and Ivancevich 1978). The subjectivity aspect is of particular concern because subjective ratings of salespeople by managers introduce bias, ignorance, halo effects, and lack of credibility into the evaluation system (Behrman and Perreault 1982; Jackson, Keith, and Schlacter 1983). Further, the manager builds his or her model of what is effective into the system and salespeople may perceive it to be unfair. For example, a brash salesperson (at least in the manager's eyes) may work a four-day week calling on selected ac- counts. If this salesperson outsells more personable, high effort compatriots who call on many accounts, he or she may feel underrated and underpaid in a be- havior-based system. Such an individual would be tol- erated and rewarded in an outcome-based system. Another problem with behavior-based systems is that the more comprehensive they become, the more they strain management's ability to collect, sift, and combine the information. This difficulty may explain why sales managers commonly evaluate salespeople by using only a few indicators (often heavily quali- tative) on only a limited range of activities (Jackson, Keith, and Schlacter 1983). Advantages of behavior-based control. The prin- cipal advantage of behavior-based control systems is the control they afford the manager. In such systems, the sales manager imposes his or her ideas of what salespeople should be and do to achieve results, some of which may be long term. Examples of such long- term payoffs include the future sales of a pioneering product line and new or repeat orders from enhanced customer goodwill and reputation. Further, in a be- havior-based system, managers can direct salespeople to perform certain behaviors as part of company strat- egy without the necessity of convincing each sales- person that the strategy is valid. One example is the strategy of low pressure expertise selling to create a particular image. Another example is the commitment of time to forecasting and planning instead of selling. In short, behavior-based systems enable companies to execute salesforce strategies that involve develop- mental work and/or certain behaviors consistent with company strategy. Another advantage of a behavior-based philoso- phy is that it enables the manager to eliminate ineq- uities that can arise in using simple output measures. For example, in some selling jobs, factors beyond the salesperson's control have a major impact on results (Ryans and Weinberg 1979). Though it may create perceptions of inequity, subjectivity is necessary to adjust performance evaluations for these uncontroll- able factors. Otherwise, salespeople may be rewarded or punished inequitably for events they do not influ- ence (Churchill et al. 1985). 78 / Journal of Marketing, October 1987 This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms Theoretical Approaches to the Control Problem Several major theoretical approaches relevant to the salesforce control problem are agency theory, orga- nization theory, transaction cost analysis, and cogni- tive evaluation theory. The first three are pertinent to our discussion because they suggest behaviors en- couraged or discouraged by systems that monitor be- havioral processes versus those that measure out- comes. Further, these approaches suggest the circumstances under which each system is appropri- ate. Each addresses the problem with different as- sumptions and identifies different sets of variables. Hence, it is useful to compare, contrast, and combine the three approaches. Alternatively, cognitive evalu- ation theory concerns how management philosophy may affect the individual's cognition, (job) affect, and motivation. Thus, it adds a unique psychological per- spective to our analysis. In the following section we discuss these four approaches and their application to generate recommendations for an appropriate sales- force control system. Agency Theory As described by Eisenhardt (1985), agency theory is an analytical, normative microeconomics/accounting approach to the question of how principals can control the activities of the agents to whom they delegate de- cision-making authority. A central premise of this the- ory is that principals and agents have divergent goals. For example, the principal (in our case, the company) desires increased profit whereas the agent (the sales- person) desires increased personal income. Goal in- congruence places principals and agents in conflict. Agency theory is concerned with the design of control systems that realign the incentives of both principal and agent so that both parties desire the same outcome ("incentive compatibility"). For example, profit shar- ing is one element of the control system that focuses both principal and agent on the profit motive. Agency models address the risk-bearing prefer- ences of the firm and the agent (salesperson). A firm has two choices about the allocation of risk in the sell- ing environment. One is to purchase information about the agent's behavior, which it then rewards. This "be- havior control" system may be expensive because management overhead is involved. However, the salesperson is freed of the risk that appropriate sales behaviors may not generate results for reasons beyond his or her control. This system is appealing to the agent, who usually is assumed to be risk averse whereas the firm is assumed to be risk neutral (Basu et al. 1985). Alternatively, the firm can measure outcomes (which also may be costly) and hold the salesperson account- able. "Outcome control" shifts risk from the firm to the agent. The choice between outcome and behavior control depends on two factors, (1) the relative costs of measuring behavior versus outcomes and (2) the various forms of uncertainty that create risk in the sales environment. Basu et al. (1985) applied agency theory to the compensation component of the control system. They modeled the percentage of compensation that should be fixed (behavior control) versus the percentage that should be variable (outcome control) when uncer- tainty takes the form of a weak link between effort and sales performance (cf. Vroom's 1964 "expec- tancy"). The analytical model they propose indicates that the weaker the link between salespeople's effort and sales results, the higher the proportion of com- pensation that should be fixed. They argue that when efforts do not lead predictably to results (high uncer- tainty), salespeople are at high risk in that they can be penalized for results largely beyond their control. It is less expensive for the risk neutral firm to assume the risk (via salary) than to pay the very high com- mission rates risk averse individuals will demand to compensate them for the risk assumed. This hypoth- esis is consistent with Smyth's (1968) argument that when salespeople have a strong influence on whether a sale is made, they should be given incentives to ex- ercise their influence; when salespeople have little in- fluence on the sale, they should not be penalized for low sales (hence more salary). Coughlan and Sen (1986) review the propositions generated by analytical agency theory models of salesforce compensation, an important component of the control system, and underscore the importance of a model's assumption about the salesperson's risk preference. If a salesperson is risk neutral (willing to select the option with the highest expected value re- gardless of risk), an all-commission system is rec- ommended. However, if the salesperson is risk averse, the Basu et al. (1985) position becomes more tenable. In their analysis, a salary component is recommended and that component rises as the link between effort and results weakens. A second form of uncertainty is sales volatility, which puts the salesperson at risk and makes it less expensive for the firm to offer salary than to offer the level of incentive the risk averse salesperson demands. Coughlan and Sen (1986) point out that current versions of agency theory ignore several factors, in- cluding the time lag from effort to outcome (sale), factors other than effort that influence sales, interre- lated demand for multiple products (i.e., synergy or competition within the product line), and the need to perform nonselling functions. Nonetheless, agency theory generates provocative propositions about a firm's choice of a control system for the salesforce. In sum, agency theory predicts that behavior con- Salesforce Control Systems / 79 This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms trol will be used when measuring inputs is less ex- pensive than measuring outcomes and when uncer- tainty puts the salesperson at risk. Outcome control will be used when measuring outcomes is less expen- sive than measuring inputs and when environmental uncertainty is low. These and the following conclu- sions are shown in Table 1. Organization Theory Organization theory (e.g., Ouchi 1979) addresses the control issue from different premises. In contrast to agency theory, organization theory explicitly recog- nizes that (1) divergent goal preferences between salesperson and firm need not be presumed in that agents can be socialized to identify their goals with the organization's and (2) measuring either inputs, outputs, or both may be impossible (Eisenhardt 1985). The second presumption-that good measures may not exist-is in marked contrast to agency theory, which assumes anything can be measured if the or- ganization is willing to spend enough on its infor- mation system. However, in many instances, sales- forces do not have good output measures. A major factor leading to this problem is the considerable time lag between effort and outcome in many types of in- dustrial selling (Adkins 1979), a lag ignored by ana- lytical agency theory models (Coughlan and Sen 1986). Further, data often are missing or inaccurate at the salesperson level, particularly in the case of team sell- ing, where individual impact is difficult to assess (An- derson 1985). Organization theory recognizes that, even if a firm does have perfect information, it may not know how to transform it into action strategy. For example, a sales manager may know a salesperson's call rate but may not know whether the optimal strategy is to call at the same rate, make more calls on more customers, make more calls on fewer customers, or even make fewer calls. In short, a manager may not know what behavior to exercise to achieve desired results. Eisen- hardt (1985) calls this situation "low task programma- bility" and Ouchi and McGuire (1975) refer to it as TABLE 1 Recommended Control Strategies Based on Four Theoretical Perspectives as a Environment, Firm, and Individual Variables Function of Theory Transaction Cognitive Variable Agency Organization Cost Evaluation Environmental Variables High demand uncertainty Behavior High sales volatility Behavior High volatility, nonspecialized Outcome reps High volatility, specialized reps Behavior Firm Variables Willing to assume risk Behavior Small salesforce size Outcome Humanistic atmosphere Clan Outcome measurement Impossible Behavior Inaccurate Behavior Behavior Objective Outcome High cost Outcome Behavior measurement Difficult/expensive Outcome Transaction process Outcome or Outcome unknown clan Informational feedback Behavior Controlling feedback Outcome Salesperson Variables Goal congruence Outcome Risk aversion Behavior High sales "expectancy" Outcome Experience/specialization to Behavior firm Intrinsic motivation preference Behavior Extrinsic motivation preference Outcome All Other Circumstances Outcome 80 / Journal of Marketing, October 1987 This content downloaded from 152.33.118.29 on Mon, 19 Sep 2016 18:00:54 UTC All use subject to http://about.jstor.org/terms ignorance of the "transformation process" (wherein inputs become outcomes). In such instances, organization theory recognizes a third type of control system, the "clan" (Ouchi 1979). Clans represent control by neither outcome nor be- havior, but by socialization. The objective of a clan is to inspire loyalty to the principal among agents, that is, loyalty to the point of identification with the or- ganization and its goals. Though how this objective can be achieved is not entirely clear (Ouchi 1981), the critical elements seem to be a warm, humanistic work atmosphere, promotion from within, long-term em- ployment, generous pay, and support and encourage- ment of each individual. The personnel practices of clans have been compared, albeit with consider- able controversy, to Japanese management techniques (Ouchi 1981). More recently, such personnel prac- tices have been described by Peters and Waterman (1982) as characteristic of a handful of "excellent" American corporations. Despite these claims of su- periority, clans are poorly understood and expensive to maintain. Hence, Ouchi (1979) does not recom- mend their use except under certain circumstances, though Peters and Waterman (1982) disagree, arguing that clans are always appropriate. Figure 1 displays the organization theory hy- potheses about control systems. As shown, clans are reserved for situations in which little else seems fea- sible (cell 4) in that the transformation process is un- known (foreclosing behavior control) and adequate measures of outcomes are unavailable (foreclosing outcome control).2 If the transformation process is known (cells 1 and 3), sales managers can prescribe behavior, making behavior control feasible. If output FIGURE 1 Knowledge of Process by Which Behavior is Transformed into Outcomes8 Process Knowledge Perfect Imperfect High Ability to Measure Outcomes Accurately and Completely Low Behavior or Outcome control outcome control (2) (1) Behavior control (3) Socialization "clan" control (4) aAdapted from Eisenhardt (1985) and Ouchi (1979). 2However, Williamson (1985) suggests that in highly problematic circumstances, transactions may not even be arranged; hence sales- forces may not be formed to operate in cell 4. measures are poor, behavior control is the only fea- sible choice, as in cell 3. Outcome control is appro- priate if adequate output measures are available (cells 1 and 2) and is the only appropriate choice if the trans- formation process is unknown (cell 2). This framework has received partial empirical support (Anderson 1985; Eisenhardt 1985; Ouchi and McGuire 1975). In particular, the necessity of having valid outcome measures in order to employ outcome control has been supported. The clan system, how- ever, has received little attention in the literature. Literature suggests some managers prefer behav- ior control ceteris paribus, employing it even when good outcome measures are available. In particular, managers are inclined to use more behavior control as they gain experience, which gives them confidence (perhaps falsely) that they know what behavior to pre- scribe (Jackson, Keith, and Schlacter 1983; Ouchi and McGuire 1975). Mowen et al. (1985) report evidence that even experienced sales managers err in perfor- mance evaluations by overvaluing sheer effort and failing to account sufficiently for the impact of task difficulty (e.g., variations in sales territories). The organization theory approach is not without shortcomings. It is silent on the issue of which method, behavior or outcome, should be used if both are fea- sible (cell 1). Further, it does not address the cost is- sue explicitly. For example, it may be feasible to ac- quire knowledge of the transformation process or to develop outcome measures, but at such high cost that ignorance and the expense of a clan are preferable. Transaction Cost Analysis In contrast to the prescriptions of organization theory, transaction cost analysis represents the position that outcome-based control systems are to be preferred un- less certain circumstances prevail (Williamson 1985). Generally it is argued that outcome control corre- sponds to market contracting, wherein competitive forces determine survival (see John and Weitz 1984). Outcome control has the same benefit, namely that the competitive mechanism is allowed to signal success- ful strategies by eliminating practices that are ineffi- cient or …