Effects of unbalanced incentive measures on buyer performance – an empirical study in Taiwan

Abstract

PurposeThis paper aims to investigate the performance effects of an incentive plan that links buyers' compensation to financial measures, namely sales and gross margin, in the retail industry. It seeks to examine the issue using field data obtained from the 3C (computers, communications, and consumer electronics) company, the largest electronics chain store business in Taiwan.Design/methodology/approachIn addition to t‐tests, the authors use a multiple regression model to examine the impact of the buyer incentive plan on purchasing performance.FindingsIt was found that the gross margin return on inventory investment (GMROI), the most critical purchasing performance measure in retailing, deteriorated after implementing the incentive plan. Further analysis showed that although sales and gross margins increased as a result of the plan, the benefits were completely offset by a significant decrease in inventory turnover.Research limitations/implicationsThis study has two limitations. First, the case study involved a specific retail chain. Thus, the extent that the results can be generalized to other organizations or other industries has yet to be explored. Second, to obtain a more comprehensive dataset and more observations, procurement team data was used instead of individual buyer data to measure the purchasing performance.Practical implicationsManagers should be aware of possible negative impacts when they design incentive plans, e.g. dysfunctional behavior among employees.Originality/valueAn incentive plan should incorporate all critical components related to buyer performance if there is to be improvement in terms of the key performance measures. The paper contributes to the literature by providing empirical evidence about the appropriateness of the performance measures used in buyer incentive plans designed for the retail industry.