Optimal sales force compensation

Matthias Kräkel and Anja Schöttner

Journal of Economic Behavior & Organization, 2016, vol. 126, issue PA, 179-195

Abstract: We analyze a dynamic moral-hazard model to derive optimal sales force compensation plans without imposing any ad hoc restrictions on the class of feasible incentive contracts. We explain when the compensation plans that are most common in practice – fixed salaries, quota-based bonuses, commissions, or a combination thereof – are optimal. Fixed salaries are optimal for small revenue-cost ratios. Quota-based bonuses (commissions) should be used if the revenue-cost ratio takes intermediate (large) values. If firms face demand uncertainty, markets are rather thin, and the revenue-cost ratio large, firms should combine a commission with a quota-based bonus. If word-of-mouth advertising affects sales, a dynamic commission that increases over time can be optimal. When entering a new market or launching a new product, firms should install long-term bonus plans.

Keywords: Sales force compensation; Commissions; Quota-based bonuses (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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Working Paper: Optimal Sales Force Compensation (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:126:y:2016:i:pa:p:179-195

DOI: 10.1016/j.jebo.2016.03.015

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