Sales Compensation Research Articles

EXPRESS: Group or Individual Sales Incentives? What Is Best for Brand-Managed Retail Sales Operations?

This research studies sales force incentive compensation in Brand-Managed Retail (BMR) operations, which are particularly prevalent in high-end department stores and vertically integrated retailers. In particular, the research explores how a brand’s strength may affect the relative benefit to a brand from using individual versus group incentives for motivating its salespeople in BMR settings. The authors investigate this issue using a theoretical principal-agent model consisting of a risk-neutral firm employing multiple risk-averse salespeople. Interestingly, they find that a group incentive is more beneficial to a weaker brand than to a stronger one. Furthermore, the authors find empirical support for their theoretical findings from an analysis of sales compensation data from BMR operations in two different settings. The research findings suggest that managers should factor in the brand’s strength when deciding on the optimal salesperson compensation structure in BMR settings.

Sales compensation plan type and sales opportunity coverage: “Double-edged” sword effects on sales performance

Sales compensation plans affect salespeople's prospecting activity and sales opportunity coverage because they shape behavior in terms of how reps manage their territory and broader portfolio of customers. Drawing on goal-setting theory, the authors propose and test a theoretical framework which unearths a “double-edged” sword moderating effect whereby the number of pursued sales opportunities impacts the main effect of sales compensation plan type on resultant sales (performance). The reported empirical study examines salesperson data prior to and after the implementation of a new compensation plan. We then utilize the metaphor of the “double-edged” sword to further explicate the findings, whereby the volume of sales opportunities is found to moderate sales goal and quota achievement (i.e., amplifying the main effect). The research also finds that pursuit of too many sales opportunities can become overly burdensome, thereby overloading salespeople and reducing goal commitment and performance. Implications for both research and practice are discussed.

Disclosing sales compensation and its impacts on misleading sales behaviors: some observations from Taiwan’s life insurance salespeople

PurposeThe purpose of this paper is to explore how sales compensation disclosure, salespeople’s perception of corporate social responsibility (CSR) toward customers (i.e. customer-focused CSR), regulatory knowledge and coworkers’ ethical behavior may influence life insurance salespeople’s moral intensity and intentions to engage in misleading sales behaviors.Design/methodology/approachThe hypotheses are analyzed using partial least squares (PLS) regression with the data gathered from full-time life insurance salespeople in Taiwan.FindingsThe main findings indicate that disclosing sales compensations will alter the ethical decision-making process of life insurance salespeople. The findings further point out that customer-focused CSR is an important variable affecting moral intensity and ethical intentions.Originality/valueThere has not been any research on the effects of compensation disclosure on moral intensity and misleading sales behavior. The literature gap has led to a poor understanding of the relationship between the compensation disclosure policy and ethical sales behavior. Moreover, previous studies indicate that specific factors (such as moral intensity and ethical intention) are directly associated, while the research shows that as long as a regulatory policy (e.g. the policy of compensation disclosure) changes, the correlation between these variables may shift from significant to nonsignificant (or vice versa). The results are interesting enough to warrant more research, and they also show that the direct link between variables mentioned in previous research is not always stable or universal.

Two-Step Pricing Decision Models for Manufacturer-Led Dual-Channel Supply Chains

In this paper, we study the optimal profit change in a manufacturer-led dual-channel supply chain under centralized decision-making and decentralized decision-making scenarios. The supply chain is composed of only a single supplier, a manufacturer, and a retailer, and the manufacturer plays a leading role in the supply chain. Meanwhile, the following conditions exist simultaneously: the promotion levels of retailers in offline physical stores, the promotion compensation given by manufacturers to retailers, and channel competition. In order to coordinate the profits of channel members, a two-step pricing decision model is established. This research shows that using a two-step pricing decision model can make the retailer’s optimal promotion fees and the manufacturer’s optimal sales compensation fees the same as the centralized decision-making’s optimal values; however, the results are not good, because after the coordination, the retailer’s profits increase and the manufacturer’s profits decrease, and, as a consequence, the retailer needs to pay a fixed fee to the manufacturer within the validity of the contract, which is signed by both sides, to achieve a win–win situation for the channel members.

The Impact of Compensation Structure on Salesperson Perceptions and Behaviors: Insights From the Sales Literature

Compensation is one of the most effective methods used to align and motivate salespeople to accomplish sales and organizational objectives. For this reason, sales researchers have made considerable strides in understanding the impact that compensation structure has on salespeople and salesforce performance. In this article, we examine the theoretical foundations of the sales compensation literature. We then perform an extensive review of this literature to identify the perceptual and behavioral outcomes associated with incentive- and salary-based compensation. Finally, the limitations of the sales compensation research are identified, and future studies are proposed.

The Effects of Quota Frequency: Sales Performance and Product Focus

This study investigates the comprehensive and multidimensional effects of quota (goal) frequency on sales force performance. The study provides a theory of salespeople’s behavior—aggregate effort and the product-type focus—in response to the temporal length of a sales quota cycle. The theory includes many realistic elements, such as salespeople’s multidimensional effort, heterogeneity in ability, product focus, and forward-looking behavior. We test the theory through a field experiment, varying the sales compensation structure of a major retail chain in Sweden. Consistent with the developed theory, shifting to a temporally frequent quota structure leads to an increase in sales performance for low-performing salespeople by preventing them from giving up in later periods within a quota-evaluation cycle, but to a decrease in sales performance for high-performing salespeople. With quotas set over short time horizons, the high-performing salespeople focus mainly on low-ticket products, resulting in a decrease in both sales volume and the sale of high-ticket products, thus reducing the firm’s profits. This paper was accepted by Eric Anderson, marketing.

Aligning marketing and sales in multi-channel marketing: Compensation design for online lead generation and offline sales conversion

Firms engaged in personal selling in business and retail markets tend to invest substantial portions of their marketing budgets on lead generation through marketing agents and conversion by sales reps. However, such an arrangement of marketing-sales interface has often been found to be inefficient due to the multi-channel attribution problem. We use analytical models to find optimal sales compensation designs to solve the multi-channel attribution problem. Findings suggest that contracts involving revenue incentives, lead qualification, and sales autarky leave a gap between the first-best and the achieved profit due to budget balance, costs of lead qualification, and the sales force's lack of specialization in marketing, respectively. An increase in risk aversion favors sales autarky and lead qualification contracts over the revenue incentive contracts while an increase in overall uncertainty favors lead qualification. A certain type of contest (or stack ranking-based pay) achieves first-best profit when uncertainty is moderate.

Managerial Delegation Contracts, “Green” R&D and Emissions Taxation

AbstractWe introduce an explicit environmental incentive into a managerial compensation contract in the context of a Cournot duopoly with pollution externalities under an emissions tax regime. We show that, depending on the effectiveness of “green” R&D, compared to a standard sales compensation contract, the explicit environmental focused contract results in more abatement. As a consequence, the regulator sets a lower emissions tax, and social welfare is higher. Moreover, in general, firm owners earn higher profits when adopting the environmental delegation contract.

Sales Force Compensation Design for Two-Sided Market Platforms

The authors study the use of sales agents for network mobilization in a two-sided market platform that connects buyers and sellers, and they examine how the presence of direct and indirect network effects influences the design of the sales compensation plan. They employ a principal–agent model in which the firm tasks sales agents to mobilize the side of the platform that it monetizes (i.e., sellers). Specifically, the presence of network effects alters the agency relationship between the firm and the sales agent, requiring the platform firm to alter the compensation design, and the nature of the alteration depends on whether the network effects are direct or indirect and positive or negative. The authors first show how the agent’s compensation plan should account for different types of network effects. They then establish that when the platform firm compensates the agent solely on the basis of network mobilization on the side cultivated by the agent (sellers), as intuition would suggest, it will not fully capitalize on the advantage of positive network effects; that is, profit can be lower under stronger network effects. To overcome this limitation, the platform should link the agent’s pay to a second metric, specifically, network mobilization on the buyer side, even though the agent is not assigned to that side. This design induces a positive relation between the strength of network effects and profit. This research underlines the complexity and richness of network effects and provides managers with new insights regarding the design of sales agents’ compensation plans for platforms.

Sales Compensation and Recommendations as the Fund of the Month

Sales Compensation and Recommendations as the Fund of the Month

Is Cash King for Sales Compensation Plans? Evidence from a Large-Scale Field Intervention

The pervasive use of merchandise (i.e., noncash) incentives in sales compensation plans is an empirical and theoretical puzzle given the supposed superiority of cash incentives in the standard theory (i.e., principal–agent models) as well as the scant, and contradictory empirical evidence. The authors conducted a large-scale field intervention that switched 580 salespeople at a large frozen food manufacturer away from their cash plus “merchandise points” bonus to a commensurate all-cash bonus. After controlling for salesperson, seasonality, year, and target effects, the authors estimate that sales, on average, dropped by 4.36%. Furthermore, they estimated individual-level sales changes and effort changes to validate the incentive–effort–sales causal chain. The results show that the top salespeople experienced the largest drops in sales. A post-intervention survey of social and individual difference variables reveals that salespeople from households with more discretionary financial resources and those who think more abstractly about the uses of cash income exhibited smaller reductions in effort and sales. Although the absence of a control group prevents the authors from making strong causal inferences, this set of results nevertheless provides descriptive and suggestive evidence for separate mental accounts as the most promising explanation for the greater utility provided by merchandise incentives.

Optimal Salesforce Sizing and Compensation Cost: A Mathematical Approach

Salesforce constitutes one of an organization’s most productive and most expensive assets and has a major impact on overall performance of the sales organization. Salesforce sizing affects profitably of a sales organization by affecting both revenues and costs. The salesforce size affects customers, salespeople and the overall sales organization. A salesforce that is of the right size is challenged and motivated, but not overworked, connects with customers effectively, sales compensation costs are reasonable and sales as well as profitability of the organization is strong. The organization that is more effective than others (e.g., sales growth, profit contribution, market position and customer satisfaction) has a more optimal salesforce size. There are many internal and external factors affecting salesforce sizing decisions such as strategic objectives, product maturity, competitive environment, market trends and financial goals. All these factors together determine optimal return of investment for salesforce investment. This research provides a mathematical model for practicing managers to determine the optimal size of a salesforce.

Sales Organization Culture, Compensation Strategy and Firm Valuation

Many sales organizations today are focusing on their culture as a strategic tool, deciding what it should be, aligning with strategic goals, business strategy and sales compensation design. The culture of sales organization is comprised of fundamental principles and beliefs that are shared by its members and hence determines the norms that dictate how sales employees should think and behave. In addition to this, compensation systems promote behaviour of sales employees that ultimately becomes dominant behaviour in the sales organization. An effective sales performance supported by an appropriate compensation strategy and culture of sales organization plays a significant role in determining financial performance, enhancing valuation of the sales organizations and increasing competitive advantage in the market place. This research provides various frameworks and models for establishing relationship between organization culture and compensation structure and deriving its impact on sales performance. Study also provides numerous illustrations to calculate optimal compensation structure and corresponding organization culture to achieve maximum valuation of sales organization.

Sales Compensation Strategy

Sales compensation is of primary concern to both sales employees and sales organization as it is central to their working relationship. Compensation strategy decision regarding pay level (total earnings generated) and pay mix (relative proportion of fixed pay and variable pay) are both vital in sales compensation plan. This research explains major attributes of pay level and pay mix design of sales organization and identifies various factors influencing it. Advantages and disadvantages of fixed as well as variable pay are presented in the article. It also provides analytical frameworks and models for calculating optimal pay level and pay mix. An effective compensation plan through optimal design of pay level and pay mix successfully balances the needs of salespeople, sales organization and customers simultaneously to maximize value of the organization. Finally, research concludes with an illustration to provide methodology for calculating optimal value of pay level and pay mix in a sales organization.

Compensation, Ethical Sales Behavior and Customer Lifetime Value

A salesperson’s ethical behavior plays a critical role in forming, maintaining and sustaining long-term customer relationships. Ethical sales behavior increases customer satisfaction, trust, loyalty and eventually enhances customer lifetime value (CLV). The CLV approach quantifies the potential monetary value of customers over their lifetime and builds linkages between ethical sales behavior and the financial performance of the organization. An ethical sales practice is one of the drivers influencing and enhancing CLV. An ethical climate of the organization can be reinforced by implementing an effective sales compensation plan. The purpose of effective sales compensation is to recognize the role fulfilled by salespeople to maximize CLV as a result of ethical sales behavior. The frameworks developed in this research illustrates how the compensation practices of an organization influence ethical sales efforts and also shows that what a salesperson does influences customer acquisition, customer retention and customer expansion in the form of cross-selling/up-selling, which in turn affects customers’ CLV or their profitability to the organization. This article also provides a methodology for CLV calculation and provides its key dimensions. The research identifies various drivers of unethical sales behavior, looks at the optimal design for the sales compensation plan and develops various models for enhancing ethical behavior of salespeople and ultimately CLV.

Managing Sales Compensation Across the Economic Cycle

Sales organizations need to closely scrutinize the role of their sales force and its overall compensation costs. If organizations adapt to the changing internal and external environment, they are likely to be more successful and profitable. The sales force compensation plan should be compatible with the changing nature of the job, depending on stages of economic cycle. The economic life cycle stages are likely to be a key determinant of sales compensation strategies and their effectiveness in achieving organizational goals. Sales organizations must design a compensation strategy based on sales efforts and market dynamics according to economic cycle. Sales organizations must reassess their sales force structure and associated compensation plan across the economic cycle. This article illustrates economic as well as a noneconomic analysis for optimal choice between direct sales reps and independent reps. Various frameworks provided in this article will help managers of sales organizations in effectively managing compensation costs across the economic cycle.

Realigning Fixed and Variable Pay in Sales Organizations

The attractiveness of the pay policies of sales organizations can be increased by higher levels of match between individual characteristics of sales people and those of the compensation structure. Sales organizations should consider the career life cycle stages of sales people when devising compensation strategies. One type of sales compensation plan does not match all stages of career life cycle for a sales employee. Sales organizations can tailor expectations, motivations, reward strategies, as well as compensation structure according to career life cycle stages. To maximize sales force productivity and hence profitability of the sales organization, sales organizations should strive to find an optimal set of pay mix to motivate sales employees at each stage of career life cycle. This article provides various frameworks for analyzing impact of career stages on salesforce performance. This research identifies diverse variables impacting pay mix of sales employees and suggests a practical approach for enhancing productivity of sales employees across career life cycle stages.

Managing Sales Compensation

A company and the configuration of its sales force have to evolve as the company goes through the stages of its life cycle. Sales force configuration involves decisions that reflect sales strategy, sales force structure and sales force size. Specifically, it focuses on how the sales personnel apportion their efforts among different products, customers, geography and selling activities (sales strategy); the differing roles that internal sales force and external selling partners should play (sales force structure) and the sales force capacity to effectively serve the customers (sales force size). Sales force configuration management is critical because it determines how quickly a company can adjust its sales forces in response to market opportunities, while balancing compensation costs and profitability. This article discusses how sales force configuration variables change across the life cycle and identifies best-case scenario for optimal performance.

Managing Sales Force Compensation

Sales force compensation is influenced by various factors of development and change occurring at the individual, product, organizational and environmental levels. Companies that adapt to changing circumstances are likely to be more successful. The sales compensation strategy should be realigned according to changes in those factors. When they are viewed from the life cycle perspective, it gives rise to career life cycle of sales employees, product life cycle, organizational life cycle and business life cycle. Compensation practices are being increasingly planned and managed in response to changing circumstances. Whereas in the past researchers focused almost exclusively on how changes in compensation practices affect employee performance or satisfaction, researchers are now beginnings to ask how organizational as well as environmental conditions shape compensation practices. This article discusses several factors affecting the design of sales compensation systems and proposes a life cycle and a business value–added framework for strategic compensation planning.

Incomplete and imperfect information for sales compensation

Sales force compensation represents the fix and / or variable payment by the company. To compensate agents based on the results, the company set a goal which is brought to their attention through the compensation plan. Applying the model of moral hazard, where the agent behavior cannot be verified, it cannot be specified in the contract what is the expected behavior of the agent. In order to make an offer to contract principal should know the effort that the agent will submit it to define the payment and the contract is determined optimally in trade between the two conflicting objectives of the two participants in the contract. Although agent behavior cannot be verified, the result of this behavior should be measurable at the end of the contract so that the employer may make the contract contingent on effort commission agent for sale of which is measured by the amount of earnings to the company.