Salesforce Compensation Plans Research Articles

Designing salesforce compensation programs to improve pricing execution

Despite progress over the past few years, the pricing function has far to go to reach the maturity of other business disciplines. In the area of pricing execution, also known as price getting, many firms do not fully realize the potential of their pricing strategies and are instead stuck in a zone of good intentions. Often, this lack of strategy-execution results is due to issues with salesforce compensation plans and how they might be encouraging the wrong behaviors. As the pricing and sales literature remains silent on the connection between pricing execution and salesforce compensation, we conducted qualitative interviews with 12 pricing executives to inform the relationship between the two constructs and to identify best practices in the design of salesforce compensation plans to improve pricing execution. Our results highlight the sensitivity of the topic of changing salesforce compensation and the need to add pricing as part of a basket of variables, to consider a 2- to 3-year transition period, and to embrace critical change-management considerations. Finally, the need for accurate and transparent pricing information is essential to the design of these profit-driven salesforce compensation plans.

Optimal Sales Force Compensation in Dynamic Settings: Commissions vs. Bonuses

This paper studies optimal sales force compensation plans in a multiperiod moral-hazard model when the firm wants to implement high effort in every period but only obtains aggregate information on sales. The sales agent chooses effort each period after observing previous sales, and his incentive responsiveness might change over time. The paper derives conditions under which a linear incentive scheme—a pure commission—dominates a bonus plan and vice versa. A commission is optimal if the agent is most difficult to motivate in the last period. Otherwise, combining the commission with a bonus plan can lower the firm’s cost of providing incentives in earlier periods. The results are robust to different types of cost externalities and demand externalities across periods. However, if the firm obtains intermediate sales information, bonus plans dominate commissions. This paper was accepted by J. Miguel Villas-Boas, marketing.

Two Major Antecedents of Salesforce Motivation: Salesforce Control Systems and Compensation Plans

Salesforce motivation is important for the success of the organization. Unless and until the salesforce is motivated, the organization will not be able to prosper. There are various factors that are responsible for salesforce motivation. It has been found that out of these many factors, the impact of salesforce control system and salesforce compensation plans is inevitable. Therefore, this study makes an attempt to analyze the impact of these two factors on salesforce motivation by following a review of selected studies from the year 1977 to 2014. Till now, none of the previous studies have analyzed the impact of these two factors on motivation. The review of studies reveals that salesforce control systems and compensation plans should be taken into consideration when motivation of salespeople is talked about as they have an impact on intrinsic as well as extrinsic motivation of salespeople. Based on the findings of the review, a framework is designed and implications and directions for future research are stated.

Dynamic Incentives in Sales Force Compensation

To inform the design of sales force compensation plans when carryover effects exist, we propose a dynamic model where these effects, together with present selling efforts, drive sales. Our results show that a salesperson with low risk aversion exerts effort to decrease attrition from existing business, whereas a salesperson with high risk aversion does not. Why? Because carryover increases not only expected sales but also sales uncertainty. Consequently, the manager should incentivize the high risk-aversion salesperson with a concave compensation plan to counterbalance suboptimal customer attrition, and the low risk-aversion salesperson with a convex compensation plan that limits coasting on past efforts. We generalize our results to when the firm employs multiple salespeople, and when advertising and personal selling are budgeted together.

Optimal sales force compensation

We analyze a dynamic moral-hazard model to derive optimal sales force compensation plans without imposing any ad hoc restrictions on the class of feasible incentive contracts. We explain when the compensation plans that are most common in practice – fixed salaries, quota-based bonuses, commissions, or a combination thereof – are optimal. Fixed salaries are optimal for small revenue-cost ratios. Quota-based bonuses (commissions) should be used if the revenue-cost ratio takes intermediate (large) values. If firms face demand uncertainty, markets are rather thin, and the revenue-cost ratio large, firms should combine a commission with a quota-based bonus. If word-of-mouth advertising affects sales, a dynamic commission that increases over time can be optimal. When entering a new market or launching a new product, firms should install long-term bonus plans.

판매원의 경험에 따른 임금의 동태적 변화 고찰

판매원의 경험에 따른 임금의 동태적 변화 고찰

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.

Reallocating Fixed and Variable Pay in Sales Organizations

Organizations design and implement incentive plans to attract, retain and motivate their sales force. With the objective of achieving goal congruence between the sales organization and its sales force, many sales organizations implement variable pay plans. However, in the case of the sales carryover, such incentive plans do not always align sales force motivations with organization objectives. This article identifies various factors affecting sales carryover and examines its impact on the sales organization as well as the sales force. This article also recommends various strategies for mitigating the impact of sales carryover and suggests appropriate modifications in sales force compensation plans. By reallocating fixed and variable pay in compensation plans, sales organizations can inhibit the adverse impact of sales carryover and align the objectives of the sales organization and the sales force.

Restructuring Fixed and Variable Pay in Sales Organizations: A Product Life Cycle Approach

Organizations must review and update sales management practices and their compensation strategies according to the different stages of product life cycle (PLC). The PLC can be a valid framework for assessing organizational response in terms of marketing mix variables and sales force compensation strategy based on sales efforts. Fluctuations in sales growth, profit margins, asset turnover, and return on net assets are normal outcomes of the PLC and strongly influence compensation strategy. Restructuring fixed and variable pay in compensation plans according to the PLC will help organizations design an optimal compensation strategy. The primary objective of this article is to propose a framework for selecting an appropriate sales force compensation plan according to the various stages of the PLC.

Relative explanatory power of agency theory and transaction cost analysis in German salesforces

In this paper, we take an integrated view of Transaction Cost Analysis (TCA) and Agency Theory (AT) in order to study the direct salesforce vs. rep decision and the design of compensation plans in German salesforces. We test, with a single data set, a set of established and new hypotheses of both theories in the context of both decisions. This allows us to assess the complementarity of AT and TCA by estimating the relative explanatory power of the two frameworks for each of the two decisions. On the one hand, we find support for most of the established hypotheses. However, the hypothesized effect of uncertainty is rejected in our data set. Moreover, we document the impact of some new variables. We also find that, while AT does not add much to explain the decision of direct vs. rep in our data, TCA is equally limiting in helping understand the design of salesforce compensation plans. Therefore, one has to be cautious in treating AT and TCA as complementary theories.

An Empirical Examination of Economic Rationales for Companies' Use of Sales Contests

The use of sales contests in sales force management is growing in popularity and receiving increasing allocations of sales budgets in many industries. So far, however, the sales management research literature offers little guidance on why and when firms benefit from employing openended and/or sales contests instead of regular commission or quota-based bonus plans to motivate their sales forces. In this article, the authors review economic agency and tournament theory-based rationales for the use of contests as incentives. Based on this review, the authors develop a number of hypotheses about the effects of various characteristics of the selling environment, sales force, sales force control and regular sales force compensation plan, on the likelihood of companies being users of sales contests in general and closed-ended sales contests in particular. The hypotheses are tested on data from two independent surveys of sales organizations in the USA and Germany and many receive empirical support, suggesting that the agency- and tournament-theoretic models can usefully serve to guide sales managers' use and design of sales contests in the future.

Optimal sales force compensation plans: an operational procedure

This paper describes an operational procedure for identifying optimal sales force compensation plans featuring salary, commissions and/or quota/bonus. Utility-maximising salespeople's behaviours and reactions to given compensation plans are simulated, and the resulting sales, costs and long-term expected profits are assessed. Then, a search technique attempts to identify the long-term profit-maximising compensation plan structure. Operationally, the simulation model parameters are calibrated so as to reflect those of an actual sales force, and consequently the optimal compensation scheme for this specific sales force can be identified. The concept is illustrated in an actual case study.

Optimal conditions for sales force equitable compensation

Past theoretical sales force compensation research has typically applied paradigms from economic theory in order to derive optimal decentralized control schemes. This research stream has generally neglected the important equity aspect of sales force compensation plans which is recognized in the professional literature. This paper shows how equity theory provides a valuable paradigm for analyzing this problem within a centralized sales force control framework. Its purposes are to provide guidelines to sales managers for determining short-term remuneration levels and sales objectives for a heterogeneous sales force through application of equity theory, and to propose a few normative implications for sales force equitable compensation.

Sales force compensation and incentive schemes: Practices in the South African pharmaceutical industry

Compensation plans that incorporate incentive schemes act as a sales force motivator. This study deals with sales force compensation plans from a management perspective, in the South African pharmaceutical industry. A literature review of incentive schemes is provided. Results are reported about the compensation plans and incentive schemes of 38 organisations. The design, implementation, and evaluation of sales force compensation and incentive schemes are discussed. Guidelines for the development of sales force incentive schemes are provided.

The Role of Bonus Pay in Salesforce Compensation Plans

Recent data suggest growing use of bonus payments in salesforce compensation plans to improve sales productivity and to achieve a variety of organizational objectives. We report findings from two cross-sectional field studies—a firm-level survey and a salesperson-level survey—on how bonus payments help attain selected firm objectives and their usefulness in eliciting higher salesperson performance and reducing salesforce turnover. Our findings reveal that bonuses may be effective in inducing higher sales productivity because of their flexibility in tying rewards to performance. Further, they may be effective in directing salespeople’s efforts toward specific organizational objectives such as promoting new product sales or sales to new customer groups, and enhancing customer satisfaction and retention.

From the sides of firm to manage the salesforce compensation plans

Most firms are small-scale, they may not have adequate experience, capability to design a salesforce compensation plan which will maximize problem between the firm’s profit and salespeople’s income at the same time. In this paper, we are only to concern the maximum problem of the firms. We hope to provide guidance with a simple mathematical model to a sales manager interested in modifying their compensation plans.

Predicting the long-run profit impact of a contemplated sales force compensation plan

Predicting the long-run profit impact of a contemplated sales force compensation plan

Predicting the Long-Run Profit Impact of a Contemplated Sales Force Compensation Plan

Predicting the Long-Run Profit Impact of a Contemplated Sales Force Compensation Plan

Predicting the long-run profit impact of a contemplated sales force compensation plan

Analytical sales force compensation research offers only limited answers to sales managers who try to devise effective compensation plans, because it often rests on restrictive assumptions, and it considers only simple compensation plan structures. In practice, sales managers need to predict how alternative and relatively complex compensation schemes would affect sales revenues and profits, as well as their likely impacts on sales force morale and turnover. This is why they typically obtain key salespeople’s prior reactions to a new scheme, or pretest the new plan on a limited scale. These procedures, however, may not provide accurate long-run predictions, and they can be applied to only one or two schemes at a time. The paper proposes the application of a simple Markovian model for assessing the long-run impacts of alternative compensation plans on sales and profits, taking into account the associated benefits and/or costs of variations in sales force motivation and turnover. A simple application is provided and implementation issues are discussed.

Quota-Based Compensation Plans for Multiterritory Heterogeneous Salesforces

We compare quota-based salesforce compensation plans with the BLSS plan, i.e., the optimal curvilinear agency-theory-based compensation plans proposed in 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.). A quota plan pays a fixed salary which is supplemented by commission income that is a prespecified fraction of the dollar sales that exceed the quota. For a salesforce comprised of multiple salespersons/territories, we consider a basic quota plan where the commission rate and salary remain the same across salespersons; however, quotas vary across salespersons/territories. Compared to the BLSS plan that is individually tailored to each salesperson/territory, the basic quota plan's total nonoptimality in profit has two components: (i) a shapeinduced nonoptimality arising from the fact that the quota-based plan does not have the same optimal shape as the curvilinear BLSS plan, and (ii) a heterogeneity-induced nonoptimality arising from the fact that the salary and commission rate in the basic quota plan are constrained to be the same across the salesforce. Our numerical experiments indicate that the total nonoptimality is merely about 1% for the parametric scenarios studied. The basic quota plan is simpler to implement than the BLSS plan. Furthermore, changes in business conditions in a territory, or the transfer of a salesperson from one territory to another, can be accommodated by changing only the quota, without having to change the salary and the commission rate structure. Such advantages, together with our result that the nonoptimality is slight, suggest that quota-based plans offer considerable potential as a salesforce compensation scheme.