Incentives and gaming in a nonlinear compensation scheme

Hideo Owan, Tsuyoshi Tsuru and Katsuhito Uehara

Evidence-based HRM, 2015, vol. 3, issue 3, 222-243

Abstract: Purpose - – Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory. Design/methodology/approach - – The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate. Findings - – The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high. Research limitations/implications - – The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it. Originality/value - – This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.

Keywords: Personnel economics; Employee motivation; Gaming (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ebhrmp:v:3:y:2015:i:3:p:222-243

DOI: 10.1108/EBHRM-09-2014-0023

Access Statistics for this article

Evidence-based HRM is currently edited by Prof Thomas Lange

More articles in Evidence-based HRM from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().