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An Investigation of the Equal Commission Rate Policy for a Multi-Product Salesforce

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  • V. Srinivasan

    (Stanford University)

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    Abstract

    For a multi-product sales force, the policy of paying commissions as an equal percentage of realized gross margins is shown to be in general, nonoptimal from the firm's profit maximization point of view. For a homogeneous salesforce, the nonoptimality results from the fact that earlier research while taking into account the effect of commission rates on a salesperson's allocations of total time to the multiple products, has not incorporated the effect of commission rates on salesperson's total selling time (resulting from his/her trading off income vs. total time to maximize utility). The equal commission rate policy is, however, optimal for the cases of (i) salesperson with a fixed total selling time and a minimum income requirement and (ii) "fair-income" salesperson whose total selling time is merely a function of income (and not based on rate of change of income as in the utility maximization case). If the salesforce is heterogeneous (e.g., different salespersons have differing sales responses to selling time) this makes the equal commission rate policy to be, in general, nonoptimal even for the restrictive cases (i) and (ii). It is suggested that the commission rates be set higher for products with greater elasticities (relating quantities sold to selling times). The common practice of paying commissions as a percentage of total dollar sales (rather than gross margins) is shown to be optimal under certain assumptions.

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    File URL: http://dx.doi.org/10.1287/mnsc.27.7.731
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 27 (1981)
    Issue (Month): 7 (July)
    Pages: 731-756

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    Handle: RePEc:inm:ormnsc:v:27:y:1981:i:7:p:731-756

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    Related research

    Keywords: marketing; marketing: sales force;

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    Cited by:
    1. Albers, Sonke, 1996. "Optimization models for salesforce compensation," European Journal of Operational Research, Elsevier, vol. 89(1), pages 1-17, February.
    2. Lee, Chung-Yee & Yang, Ruina, 2013. "Compensation plan for competing salespersons under asymmetric information," European Journal of Operational Research, Elsevier, vol. 227(3), pages 570-580.

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