Monitoring and Incentives in Sales Organizations: An Agency-Theoretic Perspective
Our primary objective in this paper is to analyze a framework that simultaneously examines the role of monitoring and incentives in the design of sales force control systems. Previous research has focused exclusively on the role of incentives in directing salesforce effort. We build on the structure provided by the past work and analyze an agency-thoeretic model in which a salesperson generates wealth for the firm by expending effort across two dimensions, namely, internal and external. We assume that effort in the internal dimension can be monitored relatively cheaply whereas effort in the external dimension can be monitored only at infinite cost. We then analyze the following two scenarios: (i) a pure incentives world wherein both effort dimensions are governed through the use of incentive pay, and (ii) a monitoring and incentives world wherein the internal dimension is monitored and the external dimension is governed through the use of incentive pay. In addition to modeling the notion of partial monitoring in this manner, we also explicitly allow the firm to choose the level of risk aversion desired in its salesperson. Of course, salespeople who are relatively risk-tolerant command higher reservation wages; consequently, such salespeople are likely to be valuable only to those firms that emphasize incentive pay in their control systems. Our analysis across the two scenarios helps us to demonstrate the implications and value of introducing monitoring into the control structure. Specifically, we find that monitoring allows the firm to decrease the weight placed on incentives and hire a relatively risk-averse salesperson from the salesforce labor market. These actions, in turn, permit the firm to reduce the risk premium and the reservation wage offered to the salesperson. In direct contrast to these monetary savings, however, we find that an adverse side effect of monitoring is that it induces salespeople to overemphasize the effort devoted to the monitored dimension while underemphasizing the effort devoted to the nonmonitored dimension. This adverse effect of monitoring notwithstanding, we find that the overall benefit of increased monitoring is that it allows the firm to the amount of total compensation paid to the salesperson. These analytical findings are consistent with the prescriptions found in the popular business press where it is often stated that compensation plans that emphasize incentive pay are characterized by independence in managing activities (lack of monitoring) as well as high income potential. These findings are also consistent with the popular wisdom that incentive-laden compensation plans are generally more appropriate for individuals who are risk takers and entrepreneurial in nature. We also delineate the conditions where monitoring can improve on the profits obtained in a pure incentives world. Specifically, we find that monitoring can prove to be most valuable when the importance of internal activities is high and the level of incentives is low. Finally, we conclude by conducting a sensitivity analysis to examine the robustness of our results to the specifications we utilize in our modeling efforts. Overall, we view the main contribution of our research efforts as one of explicitly delineating the tradeoffs associated with the use of monitoring and incentives in the design of salesforce control systems. As such, our paper should be of interest to academics and practitioners interested in the design of salesforce control systems.
Volume (Year): 17 (1998)
Issue (Month): 2 ()
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
- Rajiv Lal & Richard Staelin, 1986. "Salesforce Compensation Plans in Environments with Asymmetric Information," Marketing Science, INFORMS, vol. 5(3), pages 179-198.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
- Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, vol. 31(2), pages 134-149, February.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-328, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
- Rajiv Lal & V. Srinivasan, 1993. "Compensation Plans for Single- and Multi-Product Salesforces: An Application of the Holmstrom-Milgrom Model," Management Science, INFORMS, vol. 39(7), pages 777-793, July.
- Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:17:y:1998:i:2:p:107-123. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.