You must be familiar with the term ‘Unintended Consequences.’ This concept not only holds the key to improving your sales performance but is also the root cause behind dramatic failures of seemingly well-designed incentive programs.  

To better understand, let us look at one of the most talked-about case studies about unintended consequences. 

The Cobra Effect 

Almost a century ago, when the British government was ruling India, they found too many venomous cobra snakes in the city of Delhi. To deal with it, they declared a cash incentive for people who kill the snake and submit the dead snake. 

Initially, the program was very successful. The number of snakes dropped significantly, and people were making loads of money. Easy money, right?  

But as the snake population dwindled, the money dried up too. At this point, some clever folks started breeding cobras to ensure a regular supply. Soon, the government realized that the program was too expensive, and it was cancelled. 

Stuck with a useless inventory of snakes, the breeders just released them into the city. As a result, the number of cobras in Delhi exploded to levels much higher than what it was at the beginning of the program.  

This is an example of Perverse Incentive where the incentive program unintentionally encourages the participants to go for personal gains, instead of following the spirit of the program.      

Recent Example of Wells Fargo   

More recently, the Wells Fargo, a reputed bank in the US, heavily incentivized its employees to increase the number of transactions per customer. The employees got greedy and started accepting/creating applications using shady business practices. 

This resulted in 1.5 million unauthorized deposit accounts and at least 500,000 unauthorized credit card applications. All this led to a huge damage to the brand, and millions of dollars in legal challenges. The bank got hit by the Cobra Effect, while nobody from the top leadership to the incentive designers saw it coming.  

So, how can sales compensation plan designers avoid the Cobra Effect i.e., unintended consequences?  

Avoiding Cobra Effect 

Unintended consequences can alter motivation, breed corruption, cause financial losses, and damage brand reputation. 

In both above cases those who designed the incentive program didn’t think that the participants will perceive the program as a money-making machine. As for sales compensation plan designers, just the awareness about Cobra Effect, by itself, will keep them alert about possible unintended consequences.  

One will put controls to avoid a problem, only when one expects the problem. In both above cases, incentive designers didn’t envision the problem.  

If the payees on the sales compensation plan know that they would be on the plan for a short term, there is higher possibility of Cobra Effect. Why would they not think of the program as ‘money-making’ machine? If you have a high turnover amongst salespeople, you should be extra aware of the ‘unintended consequences’ and put additional controls.   

As for controls, the person(s) responsible for keeping an eye, should not be on the same incentive programs. In case of Wells Fargo, the branch managers themselves were getting incentivized by a similar metric, so they turned a blind eye towards their team’s behaviour. For sales compensation, HR and Finance should be responsible for the controls.   

You need smart compensation plans to attain long-term growth and proper alignment on strategic goals.  

For additional info on smart plan design, here is another blog – How to design and plan fundamentals while planning sales compensation.