IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Compensating Heterogeneous Salesforces: Some Explicit Solutions

Listed author(s):
  • Ram C. Rao

    (The University of Texas at Dallas)

Registered author(s):

    This paper considers the question of how a sales manager should design the optimal compensation scheme for his salesforce when it consists of salespersons of varying selling skills, i.e., when the salesforce is heterogeneous. The manager's problem is to reward the salespersons based on observable, uncertain sales achieved by the salespersons. Under the assumption that both the manager and the salespersons are risk neutral, the optimal compensation scheme is derived. It consists of the manager offering a menu of plans, consisting of a quota, a payment for meeting quota, and a constant commission rate for sales above or below quota. Such schemes using constant commission rates are also called menus of linear plans. Salespersons choose the quota which best suits them, achieve sales, and are then rewarded based on their actual performance. This scheme, variants of which are often observed in practice, is shown to be optimal for sales environments characterized by commonly encountered sales response functions, and a large class of frequency distributions of selling skills in the salesforce. The problem is solved using the methods of principal-agent models. The key differences in managing homogeneous and heterogeneous salesforces are highlighted. Finally, the paper discusses the issues involved in practically implementing the optimal compensation scheme.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 9 (1990)
    Issue (Month): 4 ()
    Pages: 319-341

    in new window

    Handle: RePEc:inm:ormksc:v:9:y:1990:i:4:p:319-341
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:9:y:1990:i:4:p:319-341. 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.