"Why are all my sales incentives backfiring?" asked the business owner.

Indeed, have you noticed every sales target you set causes an unintended consequence?
Goodhart's Law
The business owner was flummoxed. “I wanted to grow new business generation, so I created a sales incentive for new calls. New calls went way up, but appointments went down. So I changed to an incentive for appointments. Meetings went up, but then the number of proposals went down. I created a KPI for proposals, then sales went down. Why isn’t this working?”

Like many sales programs, this set of well intentioned incentives created unintended consequences, This is known as “Goodhart’s Law”, which states “When a measure becomes a target, it ceases to be a good measure”. This happens in life and business all the time.

The Observer Effect

Scientists have understood this for years. When you observe any activity or condition, it changes the outcome. Your studious little six year old urchins turn into monsters when the teacher leaves the room, then revert to angels again when the teacher returns.

Another good example is measuring the air pressure in your car tire. When you insert the gauge, and it allows air to escape, changing the tire pressure you are trying to measure.

Every well-intentioned metric you set as a sales or marketing target will change behavior and cause undesired and unexpected results.
The Franken-car
The National Highway Administration set standards for vehicles, called the CAFÉ (Corporate Average Fuel Economy), designed to increase gas mileage for cars, and also tariffs for vehicles manufactured outside the USA.

Loophole-seeking companies then created special vehicles designed to minimize taxes and maximize profits. That led to beauties like the Subaru Brat:

  • By one set of rules, the Brat was a car. But for CAFÉ fuel economy, it was a truck.
  • By one set of rules, the Brat was an import. For tariffs, it was a domestic vehicle.

It satisfied the accountants and the regulators, but nobody bought the car/truck/whatever.
Wells Fargo Fake Accounts

Wells Fargo set aggressive KPIs for new accounts, and encouraged their bankers to cross-sell and up-sell their customers. Compensation and career advancement hinged on exceeding these quotas. The result? 1,500,000 phantom checking accounts and 565,000 phony credit card accounts were fraudulently created for customers without their knowledge or permission. The new account target became a motivator for illegal behavior.

No Child Left Behind Act

The massive educational program created in 2001 with bi-partisan support seemed so logical and practical. Create clear benchmarks for learning at each grade level, and then set aggressive programs to improve under-performing schools. Almost nobody likes the end result of this act. Teachers complain that they are expected to “teach to the test”, and aren’t allowed to use creativity or innovation in their teaching methods. Students complain they are being forced to memorize and not to think.
Goodhart's Law in Sales

A company decides to incentivize new account generation, so they create a sizeable “new account bonus”. The next thing you know, every branch office is a new account.

I worked with a company that gave managers a "Full Headcount Bonus". This motivated them to hire essentially anybody off the street who could pass a drug test and background check.

Set high expectations for outbound calls? Watch as sales reps to rack up thousands of unanswered calls to answering machines, girlfriends, boyfriends and bookies. They'll be calling robo-callers BACK!
When a Tool Becomes a Weapon

Here are some of the tried and true metrics of the old selling:

  • Activity Management
  • Calls / E-Mails per day
  • Size of Funnel
  • Profitability per Salesperson

"These classic measures are not only inadequate, but for most sales forces today, can be downright unhelpful" - Cracking the Sales Management Code, by Jason Jordan
What to Do?

Setting and tracking metrics is still important, as long as we understand the limitations. Your people will try to "game" the system, and perform unnatural acts to make their bonuses and incentives. Still, the metrics can be useful in many ways:

  • Relationships between metrics, such as win / loss ratios on proposals
  • Changes in performance, such as sudden decreases in new appointments
  • Customer engagement, such as webinar registrations and web hits
  • Marketplace changes, such as sudden decreases in premise equipment sales

Using metrics with care and selectivity can be beneficial to your business, but be skeptical of the results when you start tying compensation to them.
Meet the "Hit Mann"
Mike Schmidtmann coaches business owners and sales leaders across the USA. He works to drive results in sales recruiting, new business development, and profitability.

Mike led sales for Inacom Communications for ten years. then founded and built a $30 Million business unit for SPS.

Mike produces the award-winning Trans4mers webinar series on IT sales and management subjects. He is a frequent public speaker on business topics.

He lives on a farm in Northern Virginia with his family and assorted horses, alpacas, goats and dogs.
Upcoming Events
Trans4mers Peer Group
Post-Pandemic Growth Strategies
NYC August 9-10
454 Miles on a bike across Iowa
July 25 - 31
"Stump the Sales Pro"
  • Answering your toughest questions
  • Hiring, Managing, Winning New Logos, Growing your Business
Sep 2 - Boston
Oct 6 - Raleigh
Nov 16 - Los Angeles
The Revenue Engine of the Future: "Welcome to the New Sales & Marketing Revolution"
Mandalay Bay Resort
Las Vegas
Nov 1-4
Ancient History
Meet the Rainmakers

Cloud Conventions Webcast featuring Channel Superstars Frank Lusko, Michelle Hyde, and Dave Dyson. What practices cause them to produce as in the top 1% of all Channel Pros and MSPs?
Hosted by Mike Schmidtmann

Sunny's Silver Linings Podcast

In this week’s podcast, Mike Schmidtmann, founder of Trans4mers, talks with Sunny Kaila, CEO, IT By Design, about how an owner can be an MSP’s biggest asset and also it’s biggest obstacle when it comes to growing an MSP business to the next level.
Play "Stump the Chump"

E-Mail Mike with a vexing and perplexing question and you'll get a telling and compelling reply.
Mike Schmidtmann

(703) 408 - 9103