Measuring Rank-Based Utility in Contests: The Effect of Disclosure Schemes

Link: https://doi.org/10.1177%2F0022243719853289

Firms often use sales contests to incentivize personnel performance. By rewarding, recognizing, and motivating top salespeople through properly aligned incentives, the companies can improve their firm-wide financial outcomes.

But what is the ideal structure for sales contests? Should the contests run for one hour or one year? Should they measure total sales or customer contacts? Should they offer winners cash, gift cards, travel, or some other type of reward?

In this study, the authors examine another critical element of contest design: The way in which companies publicly disclose sales contest results. For example, in addition to informing each contestant of his/her own rank, some firms recognize the top finisher (e.g. “Salesperson of the Year”). Others recognize several winners, with either equal status (e.g. “President’s Club”) or with distinction between ranks (e.g. tiered President’s Club, with Platinum, Gold, and Silver levels). Still others announce even more information, such as a list of the lowest performers along with the rankings of the winners. The authors explore which of these disclosure schemes is most effective at motivating salespeople. They also consider whether a firm’s choice of disclosure scheme should depend on the reward structure of its sales contest.

To answer these questions, the researchers run a series of laboratory experiments in which subjects participate in contests deploying various reward and disclosure schemes. The experiments focus on the value contestants derive from achieving a particular rank in a contest, beyond the value of any reward received. They measure how much of that nonmonetary value comes from the contestant knowing her own rank (self-generated utility) and how much comes from others knowing her rank (peer-induced utility). The researchers ask contestants to make effort choices in simulated sales contests. They then observe how different incentive and disclosure structures jointly affect how much effort the contestants choose to exert. In each contest, the top half of finishers earn prizes, while the remaining contestants win nothing. Contests are played under two reward structures. While the total prize pool is the same across both, the top finisher receives a much larger reward in one structure while all winners receive similar rewards in the other. The researchers find that, even in the absence of any public disclosure, self-generated nonmonetary utility (e.g., feelings of pride, satisfaction, disappointment, etc.) helps to drive effort decisions.

Publicly disclosing contest results then generates additional (peer-induced) utility and drives even higher effort levels in nearly all contest formats. However, this effect varies across disclosure schemes and can depend on the distribution of contest rewards. Interestingly, while being recognized as a winner confers upon salespeople positive peer-induced rank-based utility, there is little difference between being recognized as the sole first-place winner (e.g. Salesperson of the Year) versus being one among multiple winners (e.g., President’s Club). Furthermore, the researchers find limited evidence that “naming and shaming” poor performers is motivating, suggesting that the potential negative effects of this approach (on turnover and morale, for example) likely outweigh any benefits. nonmonetary utility tends to be higher when rewards are more evenly distributed among winners than when there is a large difference between prizes. This research demonstrates not only the significance of rank-based nonmonetary utilities but also how commonly adopted sales management practices affect salespeople. The findings therefore contribute to research on psychological and economic motivations’ interdependence, as well as the behavioral and experimental economics literature. If rank-based nonmonetary utilities contribute to effort decisions, how can managers structure their sales contest reward and disclosure schemes to most effectively influence their employees’ effort?

Public recognition of contest winners indeed has a positive effect on salesperson effort, but shaming is likely ineffective, so managers should avoid publicizing the identities of low-ranked sales contest participants. In a general way, managers must therefore account for rank-based utility to design truly optimal sales contests and other motivational programs. They must carefully consider both prize distribution and how they will publicly announce sales contest outcomes.

In fact, public recognition and prize distribution affect salesperson motivation synergistically, not separately. Thus, they must treat decisions about the two factors as joint rather than separate considerations. For example, in determining the optimal prize distribution for a contest, sales managers should be aware that distributing prizes evenly among winners tends to amplify the effects of public recognition.