Salesforce Compensation Plans in Environments with Asymmetric Information

Abstract

In this paper, we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans. Although such contractual arrangements are not commonly used in the industry, they have been introduced and implemented by firms such as IBM and St. Regis Paper. As in our previous work on salesforce compensation plans (Basu, Lal, Srinivasan, and Staelin [Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci. 4 (Fall) 267–291.]) we use an agency-theory framework. In this paper, we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans. We also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by Basu, Lal, Srinivasan, and Staelin (Basu, A. K., R. Lal, V. Srinivasan, R. Staelin. 1985. Salesforce compensation plans: An agency theoretic perspective. Marketing Sci. 4 (Fall) 267–291.) is still optimal. Insights gained from the analyses are discussed in the context of an existing compensation scheme.