Optimal Sales Force Compensation

Matthias Kräkel and Anja Schöttner

No 2014-09, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

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)
JEL-codes: M52 M55 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-04-14
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Journal Article: Optimal sales force compensation (2016)
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