Incentives and Gaming in a Nonlinear Compensation Scheme: Evidence from North American Auto Dealership Transaction Data
AbstractThis paper examines the incentive effect of a discontinuous and nonlinear compensation scheme, using the transaction data provided by two North American auto dealerships. Under the nonlinear scheme, a salesperson's expected daily commission revenue critically depends on his position in the pay schedule on the day. We find that a measure of varying incentive intensity has a positive effect on the distribution of daily sales, suggesting that salespeople adjust their effort levels in response to the intensity of the incentive. Furthermore, incentive intensity has a negative impact on the dealership's gross profit rate, suggesting that employees are gaming the system by lowering the prices they offer customers in order to achieve more sales and larger commissions. Our study shows that there is a cost associated with a discontinuous non-linear pay scheme, which is prevalent in the industry, and raises the question of why many firms use such a form of contract.
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Bibliographic InfoPaper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a518.
Length: 28,  p.
Date of creation: Apr 2009
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Note: April 10, 2009
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Find related papers by JEL classification:
- M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executives; Executive Compensation
- M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
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