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Monitoring and Incentives in Sales Organizations: An Agency-Theoretic Perspective

Author

Listed:
  • Kissan Joseph

    (School of Business, University of Kansas, Lawrence, Kansas 66045-2003)

  • Alex Thevaranjan

    (School of Management, Syracuse University, Syracuse, New York 13244-2130)

Abstract

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.

Suggested Citation

  • Kissan Joseph & Alex Thevaranjan, 1998. "Monitoring and Incentives in Sales Organizations: An Agency-Theoretic Perspective," Marketing Science, INFORMS, vol. 17(2), pages 107-123.
  • Handle: RePEc:inm:ormksc:v:17:y:1998:i:2:p:107-123
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    File URL: http://dx.doi.org/10.1287/mksc.17.2.107
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    References listed on IDEAS

    as
    1. 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.
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    3. 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.
    4. 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.
    5. Kathleen M. Eisenhardt, 1985. "Control: Organizational and Economic Approaches," Management Science, INFORMS, vol. 31(2), pages 134-149, February.
    6. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    7. 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.
    8. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    Citations

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    Cited by:

    1. Ajay Kalra & Mengze Shi & Kannan Srinivasan, 2003. "Salesforce Compensation Scheme and Consumer Inferences," Management Science, INFORMS, vol. 49(5), pages 655-672, May.
    2. Fabio Caldieraro & Anne T. Coughlan, 2009. "Optimal Sales Force Diversification and Group Incentive Payments," Marketing Science, INFORMS, vol. 28(6), pages 1009-1026, 11-12.
    3. Fabio Caldieraro & Anne T. Coughlan, 2007. "Spiffed-Up Channels: The Role of Spiffs in Hierarchical Selling Organizations," Marketing Science, INFORMS, vol. 26(1), pages 31-51, 01-02.
    4. Sanjog Misra & Anne Coughlan & Chakravarthi Narasimhan, 2005. "Salesforce Compensation: An Analytical and Empirical Examination of the Agency Theoretic Approach," Quantitative Marketing and Economics (QME), Springer, vol. 3(1), pages 5-39, January.
    5. Murali Mantrala & Sönke Albers & Fabio Caldieraro & Ove Jensen & Kissan Joseph & Manfred Krafft & Chakravarthi Narasimhan & Srinath Gopalakrishna & Andris Zoltners & Rajiv Lal & Leonard Lodish, 2010. "Sales force modeling: State of the field and research agenda," Marketing Letters, Springer, vol. 21(3), pages 255-272, September.
    6. Dhinu Srinivasan & Alex Thevaranjan, 2016. "The role of non-financial measures in controlling myopic activities: the case of hard selling," International Journal of Accounting, Auditing and Performance Evaluation, Inderscience Enterprises Ltd, vol. 12(2), pages 103-130.
    7. 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.
    8. Alex Thevaranjan & Kissan Joseph, 1999. "Incentives and job redesign: the case of the personal selling function," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(4), pages 205-216.
    9. Yan Dong & Yuliang Yao & Tony Haitao Cui, 2011. "When Acquisition Spoils Retention: Direct Selling vs. Delegation Under CRM," Management Science, INFORMS, vol. 57(7), pages 1288-1299, July.
    10. Evrim D. Günec{s} & O. Zeynep Akc{s}in, 2004. "Value Creation in Service Delivery: Relating Market Segmentation, Incentives, and Operational Performance," Manufacturing & Service Operations Management, INFORMS, vol. 6(4), pages 338-357, May.

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