Read this situation and answer the questions that follow:

The case of the Hilti group

Leaders at Liechtenstein-based Hilti Group, which offers products and services to the construction industry, have had their own misgivings about the effectiveness of PFP and whether its focus on individual performance is out of step with the company's collaborative culture.

The family-owned company employs more than 30,000 people, 70% of whom sell its products and services directly to contractors on construction sites in 120 countries. Hilti has a decentralized structure, and the country organizations maintain their own sales forces. As the range and complexity of the company's portfolio of products and services have grown, so has the challenge for its salespeople. Initially, they simply offered the company's products to as many contractors as possible within their assigned territories. But as Hilti fully penetrated its sales territories, continued growth demanded that the company win a greater share of contractor wallets. To that end, the company increased customization and added new digital solutions, but those moves also led to more complex sales, longer sales cycles, and a solution-based selling approach. Today, Hilti's salespeople are more akin to consultants. Often, they specialize in the needs of specific industries and collaborate with colleagues, field engineers, customer service personnel, and team leaders to satisfy customer needs.

Sales compensation at Hilti has been based on a pay-for-performance system that is tailored, within centrally established guidelines, to local needs. But PFP's focus on individual sales performance and volume is increasingly out of step with the company's strategy and culture. Accordingly, in 2018 Hilti's management asked us to propose and test a new sales compensation system that would be better aligned to its needs.

We reviewed the company's market organizations globally and identified a country organization in Eastern Europe that was well suited to the rigorous study of an intervention involving a new compensation system. At the time, the country organization's 190 salespeople received 65% of their salary in fixed compensation and 35% in variable compensation, on average. But there were problems with this system.

Management was investing a significant amount of time and energy in setting compensation targets that were both fair and motivational. Longer sales cycles and the team effort required to close deals made it difficult to attribute sales to individual salespeople. Moreover, the questions of when and how to adjust the targets were frequently debated and contested. Despite management's efforts to address these problems using various formulas, setting targets for bonuses posed a chronic challenge that frequently resulted in dissatisfaction within the sales force.

The compensation system had also become too complex due to management's efforts to use it to drive an ever-increasing number of organizational priorities. Many salespeople did not understand their compensation payout or what actions it was meant to incentivize, rendering the entire system ineffective as a motivational tool. Another issue was that salespeople were turning to tactical behaviors to close the sales needed to earn their monthly bonuses. These behaviors diluted the organization's sales strategy, which was aimed at investing the time needed to establish and nurture long-term, value-based customer relationships. And finally, salespeople were unhappy with the variability in their compensation. Long sales cycles caused a high degree of fluctuation in monthly sales compensation, which sometimes left salespeople unable to meet their living expenses.

A new compensation system

On Jan. 1, 2019, the country organization selected for the experiment launched a new sales compensation system that did not link rewards to preset targets. Under the new system, the pool for fixed sales compensation increased to 97% of the average total payout for the entire sales force in the previous two years. Individually, salespeople receive a like percentage in fixed salary, with small variations based on tenure and performance. This change was intended to signal greater trust in salespeople; to better support the stretch targets, operations, and practices necessary to exploit the full potential of a sales territory; and to encourage knowledge sharing and long-term strategic behaviors.

The new compensation system also expanded the existing structure for advancement for salespeople from three levels to seven levels based on tenure and performance to give them a longer-term career path. Additionally, the country organization extended the use of game-like competitions from individual salespeople to sales teams. These quarterly competitions, which were funded with the remaining 3% of the overall sales compensation pool, featured nonmonetary rewards, such as vouchers for family dinners and amusement parks.

The results

Enhanced sales results. Initially, sales results under the new system gave us pause. In 2018, the last year under the old PFP system, net sales growth was 14.4%; in 2019, under the new target-independent system, net sales growth slowed to 11.1%. But these numbers did not account for the country's construction market, which is highly cyclical and began to slow in 2019. When we compared sales growth in relation to market growth, we discovered that the country organization outperformed the market by a factor of 1.4 in 2019 fully twice the rate of 2018.

Additionally, when we analyzed the sales results of the most extrinsically motivated salespeople, as identified in our four surveys, they still outperformed the average net sales growth rate of the organization. This allayed concerns that the performance of salespeople who were most motivated by performance bonuses would falter under the new compensation system.

Lower turnover. Despite a tight labor market, turnover within the sales force decreased by more than 4% under the new pay scheme in 2019 compared with turnover in 2018 under the PFP system.

Higher employee satisfaction. The entire organization reported significant improvements in its annual employee satisfaction scores in 2019, which were higher than in the previous five years. While this result is likely attributable to a combination of efforts, there was a uniform and significantly disproportionate improvement in satisfaction with compensation and recognition within the sales force. Satisfaction with compensation within the sales force increased by 19%, compared with a 9% increase across the entire workforce in the annual scores. Additionally, our surveys found that the perception of compensation fairness within the sales force increased significantly. From 2018 to 2020, the perception of fairness among salespeople increased by 15%.

Greater work effort. Fears that the new compensation system would result in a slackening of sales effort did not materialize. Our surveys recorded a linear increase in self-reported work effort of 7% from 2018 to 2020. Perceptions of coworker loafing rose by only 2% over the same period. Based on the above results, the country leadership team became convinced that the target-independent compensation system was outperforming the PFP system. In 2021, the team made a modification to the system by replacing the nonmonetary awards in the team competition with monetary rewards, believing that bolstering competition in this way would not result in negative outcomes or hinder collaboration.

What's the verdict?

Our research suggests that target-independent compensation systems can be superior to PFP systems in organizations that rely heavily on knowledge work and collaboration, under certain conditions.

First, the organization should have attained a certain level of cultural maturity as evidenced by employees' high levels of trust in leadership and the talent development process. The culture should also be performance-driven, with challenging goals and metrics that are used for performance accountability and improvement. Second, a target-independent compensation system should incorporate several essential design choices. Establishing the right level of fixed salary is a particularly crucial choice: It needs to be competitive in the market and convincingly signal management's trust in employees. Third, the successful implementation of a new compensation system requires the full support of senior leaders, who must commit not only to making the instrumental changes but also to fully accepting the underlying behavioral assumptions regarding the desirability of intrinsic motivation. In addition, the new system must be aligned with all current programs and processes. For example, at Hilti, there was a special bonus plan in the summer that needed to be discontinued without thwarting the underlying need to bolster sales during the vacation season. Finally, management must communicate extensively to convey its trust in employees and its performance expectations. Without a bonus system to make performance expectations obvious, leaders have to pick up the slack.

Questions

1. Name two reasons why Hilti was struggling with their PFP system and explain why each was a problem for the company.

2. Why do you think it was helpful to give the salespeople a fixed percentage salary, rather than having the bulk of the salary being related to tenure or performance?

3. What other ways might you suggest for Hilti to enhance their new compensation/incentive system? Give at least three suggestions and explain why they might help their success.

4. Having read the new compensation/incentive system, can you see any drawbacks to it? Name at least two and give detailed suggestions as to why you think those drawbacks are important.

5. Name at least one way the new compensation/incentive system affected the job design of Hilti's salespeople. Explain why.

6. Imagine that you are a consultant for Hilti, as they continue to work on improving their company. Imagine that primarily you are focused on employees that are salespeople. Come up with a strategy for each of the following and explain how and why it would work:

• To increase employees' job crafting
• To improve employee's emotional agility

Question 7

What is the difference between emotional regulation and emotional labor? (2 pts)

Question 8

Do you think certain compensation/incentive systems work better for people with certain personality traits?

• What incentives, motivators, or types of compensation do you think would work particularly well for people that are high in extraversion? Why? (3 pts)
• What incentives, motivators, or types of compensation do you think would work particularly well for people that are high in openness to new experiences? Why? (3 pts)
• What incentives, motivators, or types of compensation do you think would work particularly well for people that are high in conscientiousness? (3 pts)

Question 9

Why do you think the combination of neuroticism and conscientiousness leads to higher performance than simply conscientiousness? Explain. (4 pts)

Question 10

• Do you think people high on agreeableness would make good salespeople? Use the facets of agreeableness to explain why or why not. (4 pts)
• Given what you know about personality, which Big-5 trait do you think would be most likely to be associated with high performance in sales? Use the trait's facets to explain why or why not. (4 pts)