Be Careful What You Pay For

06 Feb 2003---When sales slump, why would anyone eliminate the incentives paid to sales representatives that are supposed to encourage more sales volume?

Case in point, the electronics retailer Circuit City.

In the face of a sales dip, the chain of high-tech toy stores is laying off about 2,000 employees. And rather than paying its remaining sales representatives more commissions to work harder at driving more products to the cash register, Circuit City is doing away with sales commissions, replacing them with an hourly wage.

Is that move designed to cut costs by paying people less? Maybe. But Circuit City describes the change as a change in its marketing strategy.

As a customer, I think I understand. Despite being an avowed gadget aficionado, I've avoided buying anything in a Circuit City store for a few years now—patronizing a couple of the chain's competitors instead. The reason: Circuit City's uncomfortable buying environment.

Those commissioned sales people just tried too hard to do their job. Rather than helpful, they came across as pushy. They so badly wanted to raise their own compensation that they treated potential buyers aggressively. And they pushed me right out of the store.

I'm only guessing here, but I'll bet the retailer's own research revealed that my experience—and response—was becoming more typical, and costly to Circuit City's top and bottom lines.

Incentive pay can be effective in encouraging employees to engage in certain behaviors to produce desirable results. But without adequate guidelines and supervision to assure quality and limit potential abuses, incentive pay can encourage counterproductive, even aberrant, behavior—and undesirable results.

Example: auto mechanics paid more to stick customers with bigger bills rather than doing quality repair work.

As SmartMoney.com points out: "Being paid on commission is often at the heart of a repairman's overzealousness. This is what got Sears into so much trouble, when California accused the department-store chain of selling unnecessary auto repairs and service."

In that dramatic example of incentive-induced abuses in 1992, Sears auto "advisors" received extra compensation for selling specific products and increasing the dollar volume of the repairs they sold. Pay-for-repairs led to widespread charges of pay-for-unnecessary repairs. As ConsumerAffairs.com recapped the widely publicized episode, "[Sears] was accused of defrauding millions of auto repair customers. It finally settled [the charges] offering $50 coupons to nearly one million auto-repair customers."

Be careful of what you pay for. When establishing variable compensation tied to particular actions or results, ask: What misconduct could these incentives encourage? Then implement systems to prevent abuses.

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