Technical Note: Optimal Salesforce Compensation with Supply–Demand Mismatch Costs

Abstract

In this study, we characterize the optimal compensation scheme for a firm that sells a single product with a limited stocking quantity through a sales agent. Our focus is on understanding how the supply–demand mismatch costs affect the firm’s optimal compensation scheme. There are two main findings. First, under the deterministic demand response, the classical optimality result of the convex increasing compensation scheme breaks with the consideration of supply–demand mismatch costs. Instead, the optimal compensation is S‐shaped under certain conditions. Second, under the stochastic demand response, the classical optimality result of the menu of linear compensation schemes fails to hold with the consideration of supply–demand mismatch costs. Instead, the optimal compensation schemes consist of a menu of linear compensation coupled with a penalty of the agent’s forecast error.