PoS Feb 2019 | Venkat’s Plan Part 2: The Game Theory Trap

My January post appears to have touched a chord. Many readers wrote to share their opinion. The overwhelming majority felt Venkat’s incentive scheme would fail. Sales report submissions would not improve.

Views were diverse but there were a few recurring themes. Some objections were ideological: should sales people be paid an incentive to do their jobs? Well, should Venkat address the problem, or hold his hand on principle even if it is not helping?

Other concerns reflected assumptions readers made. Are the reports complicated, they asked? Do executives have to spend considerable time over them? Are regional managers doing enough to impress upon their team members the importance of the task? Are they following up diligently? What if Venkat has adequately addressed these issues?

A Widespread Problem 

Many B2B firms face this challenge in spite of leveraging technology to make reporting easier and quicker. Most firms spend considerable time and effort to convey the importance of sales reporting.

Alas, success continues to be elusive in many companies. Unlike FMCG businesses, B2B companies need daily sales reports that describe the nature of interactions salespeople have with customers, influencers, and others. They are necessary so that supervisors can gain insight on executives’ approaches and customers’ response, and assist where necessary.

Interestingly most readers said the incentive program will lead to sales executives earning only Rs. 2000 per month, and that this sum would be grossly inadequate. If everyone earned Rs. 2000 every month would not the incentive scheme be successful?

Through the Lens of Game Theory 

Rs. 2000 is indeed small compared to their monthly salaries. But the fifteen sales executives are likely to work for Rs. 30,000, not Rs. 2000. Game theory suggests why this may be so.

This game is not between sales executives and Venkat. It is among the executives themselves, each competing with the other to win as much money as they can. It is fair to assume that all of them will act in self-interest. Imagine that the game is between any two players. Each has two strategies: submit reports regularly, or do not. If one submits the reports and the other doesn’t, the one who does walks away with Rs. 30,000. If both of them submit reports, then each gets Rs. 15,000 (Rs. 2000 if fifteen players are in the game). If none of them do, they get nothing at all.

The Trap!

Any reasonably rational person would see that submitting reports pays more. It is the better strategy. Everyone would therefore play their dominant or best strategy – submit reports. In spite of each earning only Rs. 2000 every month, they would be forced to continue submitting reports. If anyone doesn’t, she will gain nothing while others will share what she gave up. At the extreme end, if only one person meets the submission target, she will earn all of Rs. 30,000.

The incentive scheme is a carefully designed trap. Do not submit and others gain at your expense. Everyone submits and everyone gains a little, perhaps not enough. A simple application of game theory in a persistent problem many B2B companies face.

Why It Can Fail

Is this scheme guaranteed to work? No. If the amount is small compared to the effort, compliance will be unlikely. Venkat should calibrate the amount of incentive keeping this in mind.

What if executives manage to create a formal or informal cartel and boycott the incentive program as a group?It is a possibility Venkat should not ignore. However, it is unlikely if all or most executives are in geographically dispersed offices as is usually the case. It would even more unlikely if do not interact closely with each other on a day-to-day basis, once again the norm. Dispersion and lack of interaction would make it especially difficult for them to create informal or clandestine networks. In turn they would not be able to impose costs on people who defect.

Bold Experiments? 

Among my readers, two senior executives felt an incentive programme would work. A managing director of a large software services company narrated how it continues to be a battle that the firm is winning slowly and steadily. Aided by an incentive programme, coupled to a performance management system, and diligent supervision, compliance has been improving steadily. Now that those other things are in place, Venkat felt the time was ripe for an incentive scheme.

Would you like to try it out in your firm on a limited, experimental scale?