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Optimal sales force compensation

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  • Kräkel, Matthias
  • Schöttner, Anja

Abstract

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.

Suggested Citation

  • Kräkel, Matthias & Schöttner, Anja, 2016. "Optimal sales force compensation," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 179-195.
  • Handle: RePEc:eee:jeborg:v:126:y:2016:i:pa:p:179-195
    DOI: 10.1016/j.jebo.2016.03.015
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    More about this item

    Keywords

    Sales force compensation; Commissions; Quota-based bonuses;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M55 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Contracting Devices

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