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A Structural Model of Sales-Force Compensation Dynamics: Estimation and Field Implementation

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  • Misra, Sanjog

    (Rochester University)

  • Nair, Harikesh

    (Stanford University)

Abstract

We present an empirical framework to analyze real-world sales-force compensation schemes. The model is flexible enough to handle quotas and bonuses, output-based commission schemes, as well as "ratcheting" of compensation based on past performance, all of which are ubiquitous in actual contracts. The model explicitly incorporates the dynamics induced by these aspects in agent behavior. We apply the model to a rich dataset that comprises the complete details of sales and compensation plans for a set of 87 sales-people for a period of 3 years at a large contact-lens manufacturer in the US. We use the model to evaluate profit- improving, theoretically-preferred changes to the extant compensation scheme. These recommendations were then implemented at the focal firm. Agent behavior and output under the new compensation plan is found to change as predicted. The new plan resulted in a 9% improvement in overall revenues, which translates to about $0.98 million incremental revenues per month, indicating the success of the field-implementation. The results bear out the face validity of dynamic agency theory for real-world compensation design. More generally, our results fit into a growing literature that illustrates that dynamic programming-based solutions, when combined with structural empirical specifications of behavior, can help significantly improve marketing decision-making, and firms' profitability.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2037.

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Date of creation: Aug 2009
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Handle: RePEc:ecl:stabus:2037

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Cited by:
  1. Cheng-Feng Cheng, 2012. "Evaluate the Effectiveness of Manager Compensation," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 11(1), pages 25-44, June.
  2. Stephen P. Ryan & Catherine Tucker, 2011. "Heterogeneity and the Dynamics of Technology Adoption," NBER Working Papers 17253, National Bureau of Economic Research, Inc.
  3. Xavier d'Haultfoeuille & Philippe Février, 2011. "The Provision of Wage Incentives : A Structural Estimation Using Contracts Variation," Working Papers 2011-29, Centre de Recherche en Economie et Statistique.

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