The impact of environmental uncertainty on the design of salesforce compensation plans

Abstract

Designing a sales compensation plan is an important task of salesforce managers. Recently, researchers in the marketing literature have used an agency-theoretic framework to explain the impact of environmental uncertainty on the proportion of incentive versus fixed pay in the sales compensation plan. While the theory and its variants have been well developed, empirical tests of some of the prescriptions emerging from this framework have been limited and inconclusive. In this research, we empirically investigate the impact of environmental uncertainty on the design of salesforce compensation plans. Our findings indicate that incorporating a measure of risk aversion is crucial to obtaining support for the agency-theoretic prescriptions. Specifically, as predicted by theory, we find that the proportion of incentive pay in the sales compensation plan is influenced not only by the amount of environmental uncertainty but also by the risk preferences of salespeople employed by the firm. We also test and find directional support for the agency-theoretic prescription that the amount of total compensation should increase with an increase in salespersons' tolerance for risk. Finally, we discuss the managerial implications of these findings and outline directions for future research.