Salesforce Incentives and Remanufacturing

Abstract

We analyze how salesforce incentives influence a firm's remanufacturing strategy and profitability. We first consider a salesforce incentive model based on the practice of a North American consumer products firm, which offers commissions based on the total revenue generated from new and remanufactured product sales. We then consider a model with differentiated linear commissions for new and remanufactured products. We show that the incentives offered to a salesforce to induce effort can create conditions where a firm should not sell remanufactured products, even if the cost of remanufacturing is negligible. We demonstrate that this result holds for the compensation plan observed in practice of the focal firm as well as with differentiated linear commissions. We further find that linear sales commissions for remanufactured products should generally be lower than those for new products under both compensation models. However, commissions based on the total sales revenue generated by a salesperson, which do not differentiate between the sales of the two products, are not well suited for remanufacturing. This is because incentives based on total sales revenue result in unit sales commissions that are proportional to product prices, which always induce lower than optimal remanufactured product sales due to their lower prices. We show that by offering differentiated commissions for new and remanufactured products, firms can expand the conditions favoring remanufacturing and substantially improve profits.