Salesforce Incentives Research Articles

Breaking the Sales Force Incentive Addiction: A Balanced Approach to Sales Force Effectiveness

Dating back more than a century, companies have used incentives such as commissions and bonuses to motivate and direct the activities of salespeople. Today, sales force incentives comprise a large portion of sales force pay (approximately 40 percent on average for U.S. companies), almost all of which is linked to each individual salesperson’s short-term performance using metrics such as quarterly sales. Yet as selling becomes increasingly complex, motivating the right sales force behaviors using these traditional large short-term individual (LSTI) incentives becomes more challenging. Based on observation of various sales organizations, we suggest two propositions about the use of LSTI incentives in sales forces today. First, these incentives can create undesired consequences, including organizationally unproductive shortterm focus among salespeople that leads to a counterproductive culture and hurts company performance. Second, other sales force effectiveness (SFE) drivers are frequently more powerful than incentives for setting the right tone for the sales force, affecting sales force behaviors, and enhancing performance—especially when products and markets are complex. These propositions suggest that sales leaders should break their addiction to sales force incentives and develop a more balanced approach to motivating and controlling sales force effort using other SFE drivers in addition to LSTI incentives. By organizing a research agenda around a holistic Sales Force System framework, researchers can provide insights on the appropriate role for incentives, thereby helping sales leaders create and maintain more effective sales organizations.

The Impact of Operational Decisions on the Design of Salesforce Incentives

When facing high levels of overstock inventories, firms often push their salesforce to work harder than usual to attract more demand, and one way to achieve that is to offer attractive incentives. However, most research on the optimal design of salesforce incentives ignores this dependency and assumes that operational decisions of production/inventory management are separable from design of salesforce incentives. We investigate this dependency in the problem of joint salesforce incentive design and inventory/production control. We develop a dynamic Principal-Agent model with both Moral Hazard and Adverse Selection in which the principal is strategic and risk-neutral but the agent is myopic and risk-averse. We find the optimal joint incentive design and inventory control strategy, and demonstrate the impact of operational decisions on the design of a compensation package. The optimal strategy is characterized by a menu of inventory-dependent salesforce compensation contracts. We show that the optimal compensation package depends highly on the operational decisions; when inventory levels are high, (a) the firm offers a more attractive contract, and (b) the contract is effective in inducing the salesforce to work harder than usual. In contrast, when inventory levels are low, the firm can offer a less attractive compensation package, but still expect the salesforce to work hard enough. In addition, we show that although the inventory/production management and the design of salesforce compensation package are highly correlated, information acquisition through contract design allows the firm to implement traditional inventory control policies: a market based state-dependent policy (with a constant base-stock level when the inventory is low) that makes use of the extracted market condition from the agent is optimal. This work appears to be the first paper on operations that addresses the important interplay between inventory/production control and salesforce compensation decisions in a dynamic nature. Our findings shed light on the effective integration of these two significant aspects for the successful operation of a firm.

Research on Salesforce Incentive Systems - State of the Art, Shortcomings and Future Directions

Research on Salesforce Incentive Systems - State of the Art, Shortcomings and Future Directions

Compensation and Peer Effects in Competing Sales Teams

This paper examines how compensation systems impact peer effects and competition in collocated sales teams. We use department store sales data to show that compensation systems influence worker incentives to help and compete with peers within the same firm, which in turn changes the capability of the firm to compete with rivals. Compensation also affects how salespeople impact peers at collocated competing firms, thereby impacting market competition. Moreover, compensation influences how salespeople strategically discount prices in response to peers. Our results suggest that heterogeneity in worker ability enhances firm performance under team-based compensation while hurting individual-based firms and that peer interactions are critical considerations in designing sales force incentive plans and broader firm strategy. This paper was accepted by Bruno Cassiman, business strategy.

Frito-Lay, Inc

In the fall of 1983, executives of Frito-Lay are considering an experiment in Kansas City involving a change in the allocation of spending among advertising, consumer promotions, trade promotions, and sales-force incentives in its efforts to expand the sales of Grandma's Cookies. The amount of marketing funds under consideration is $100,000 over the current annual rate of $363,000. The experiment is to last six months. The purpose of this case is to expand student understanding of various push and pull tactics to include the concepts of trade and consumer loading/unloading, and the timing involved in these considerations. A further objective is to relate the various trade and consumer deals and promotions to consumer and competitive behavior.

Salesforce incentive within organizational life cycle: A transaction cost analysis

This paper takes an integrated view of Transaction Cost Analysis (TCA) in order to study the design of incentive compensation plans in salesforces and develops a framework of incentive compensation match to organizational life cycle. In essence, this article argues different incentive strategy, such as outcome, behavior and clan incentive control, can create different effort effect for salesforce in each stage of organizational life cycle. Three types of incentive compensation based, output, process and socialization, are proposed respectively in each stage of organizational processes. Implementing different types of incentive compensation criterion to motive salesforce to execute the corresponding strategy of organization can be built.

On the Role of Receivables in Managing Salesforce Incentives

ABSTRACT Despite the obvious problems associated with collections, firms routinely sell on credit. Conventional wisdom suggests offering credit is a necessary evil when dealing with insistent cash-constrained customers. This paper provides a more positive view of trade credit. We find that offering credit can enhance the efficiency of incentive contracts with sales personnel. In effect, with a credit sale, a client gets a second chance to generate enough cash. The client's second chance gives the sales agent another opportunity to demonstrate his past diligence to the firm. Moreover, to limit the risk associated with the fact that even a high-quality client may fail to eventually come up with funds, the firm relies on the accrual system. In particular, the agent's (discretionary and early) choice of the bad debt allowance conveys his private information regarding client quality; the payments associated with subsequent collections/default keep such reporting in check.

Allocating a Promotion Budget between Advertising and Sales Contest Prizes: An Integrated Marketing Communications Perspective

This paper develops and analyzes a normative model for allocating a fixed, short-term promotion budget between product advertising and prizes of a rank-order sales contest for a homogeneous sales force when sales are driven by both personal selling effort and advertising. The model provides insights into how the optimal budget allocations vary with the synergy between advertising and selling effort, sales force size, salesperson risk-tolerance, perceived cost of effort, selling effectiveness and sales response uncertainty. The analysis highlights the need for and value of close coordination between marketing and sales management in designing a promotion program involving both advertising and sales force incentives.

Salesforce Incentives, Market Information, and Production/Inventory Planning

Salespeople are the eyes and ears of the firms they serve. They possess market knowledge that is critical for a wide range of decisions. A key question is how a firm can provide incentives to its salesforce so that it is in their interest to truthfully disclose their information about the market and to work hard. Many people have considered this question and provided solutions. Perhaps the most well-known solution is due to Gonik (1978), who proposed and implemented a clever scheme designed to elicit market information and encourage hard work. The purpose of this paper is to study Gonik's scheme and compare it with a menu of linear contracts—a solution often used in the agency literature—in a model where the market information possessed by the salesforce is important for the firm's production and inventory-planning decisions.

Salesforce Compensation Scheme and Consumer Inferences

We investigate the salesforce compensation strategy of a firm selling products in a category that several consumers find technically sophisticated, such as electronics or financial products with legal fine print. Consumers are unable to judge the value difference between a baseline product and a product upgrade with add-on features. While the firm and the salespeople are informed of the value of these features, consumers are uncertain. Thus, consumers have to rely on sales assistance to evaluate alternatives. The salesperson decision variables include selling effort and whether to “oversell” the consumer by overclaiming the value of added features. Because sales revenue depends on both the salesperson's selling effort and consumers' valuation of the added features, the salesforce incentive scheme (which can consist of salary, sales commission, or consumer satisfaction-based commission) may induce the short-term oriented salesperson to misrepresent the value of the upgrade. Exaggeration of the value of the added features, however, results in reduced satisfaction levels leading to lower profits for the firm. We show that a salesperson selling products where the value of the upgrade is low prefers to make higher claims when the sales commission rate is sufficiently high. We conjecture that consumers aware of the incentive structure facing the salesperson expect the true value of the add-on feature to be lower than the claimed value. We study the optimal compensation scheme of a firm, which has to communicate her true type and retain its salesforce credibility. We identify the conditions under which a high-upgrade-type firm indicates its true value by altering sales commission rate and satisfaction-based commission rate.

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.

Analysis of a sales force incentive plan for accurate sales forecasting and performance

Firms require accurate sales forecasts to set plans that reflect growth opportunities as well as avoid costs such as those due to stock-outs and excess inventories. Sales forecast accuracy may be improved by using information from salespeople who possess better knowledge than central planners about their territories' sales prospects. However, salespeople may understate sales estimates when their compensation depends on fulfillment of quotas based on their sales forecasts. This paper analyzes an incentive plan introduced by Gonik (1978) that aims to reward a salesperson for self-selecting a demanding forecast as well as its actual fulfillment. We derive the salesperson's response to this plan in a stochastic environment and show how management may adjust the plan parameters to elicit desired sales estimates. The paper concludes with directions for implementation and an assessment of the benefits and limitations of the Gonik scheme.

Alternative Models of Salesmen's Response to Financial Incentives

The assumption underlying any sales force incentive compensation plan is that salesmen react to financial incentives according to some definite and consistent pattern. In order to influence salesmen's activities through financial compensation a manager must know the “rule” salesmen follow in reacting to money incentives. There is relatively little theoretical and empirical research in this area and the partial findings do not support the presence of a single behavioural pattern in response to financial incentives.