Salesforce Compensation: An Analytical and Empirical Examination of the Agency Theoretic Approach
Since the papers of Basu et al. (1985) and Lal and Srinivasan (1993), marketing academics have been interested in the design and implementation of optimal compensation plans. The literature has focused on agency theory as a foundation to help describe and understand this process. Although there has been much theoretical work on this topic, empirical evidence to support this theory remains sparse. Studies by Coughlan and Narasimhan (1992) and John and Weitz (1988, 1989) have found some early evidence that supports agency theory. In this paper we revisit the issue of salesforce compensation on both theoretical and empirical fronts. On the theory side we build a game theoretic model of salesforce compensation that accounts for risk aversion on the part of both the principal and the agent. We further show that accounting for the firm size within the analytical framework yields new insights into the nature of compensation design. The results obtained from our model, while substantiating past findings, offer some new insights into the compensation design process. In particular we find that firm demographics play an important role in the design of the optimal compensation scheme. We then use two datasets collected ten years apart by the Dartnell Corporation to investigate and test hypotheses generated by our model and the extant literature. Our results show that the basic tenets of agency theory continue to hold over time and that our new theoretical hypotheses are consistent with the data. Using the two datasets we also find that inter-temporal changes in salesforce compensation coincide with the advent and adoption of new technologies. Our research thus adds to our substantive knowledge of the drivers of salesforce compensation, while adding to the theoretical structure through taking account of the possibility of principal risk aversion. Copyright Springer Science + Business Media, Inc. 2005
Volume (Year): 3 (2005)
Issue (Month): 1 (January)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/business+%26+management/marketing/journal/11129/PS2|
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.
- 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.
- Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
- Mrinal Ghosh & George John, 2000. "Experimental Evidence for Agency Models of Salesforce Compensation," Marketing Science, INFORMS, vol. 19(4), pages 348-365, August.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Joseph E. Stiglitz, 2002.
"Information and the Change in the Paradigm in Economics,"
American Economic Review,
American Economic Association, vol. 92(3), pages 460-501, June.
- Stiglitz, Joseph E., 2001. "Information and the Change in the Paradigm in Economics," Nobel Prize in Economics documents 2001-8, Nobel Prize Committee.
- Brian J. Hall & Jeffrey B. Liebman, 1997.
"Are CEOs Really Paid Like Bureaucrats?,"
NBER Working Papers
6213, National Bureau of Economic Research, Inc.
- Mayers, David & Smith, Clifford W, Jr, 1982. "On the Corporate Demand for Insurance," The Journal of Business, University of Chicago Press, vol. 55(2), pages 281-96, April.
- John R. Hauser & Duncan I. Simester & Birger Wernerfelt, 1994. "Customer Satisfaction Incentives," Marketing Science, INFORMS, vol. 13(4), pages 327-350.
- Ram C. Rao, 1990. "Compensating Heterogeneous Salesforces: Some Explicit Solutions," Marketing Science, INFORMS, vol. 9(4), pages 319-341.
- Anne T. Coughlan & Subrata K. Sen, 1989. "Salesforce Compensation: Theory and Managerial Implications," Marketing Science, INFORMS, vol. 8(4), pages 324-342.
- Jensen, Michael C & Murphy, Kevin J, 1990.
"Performance Pay and Top-Management Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 98(2), pages 225-64, April.
- Kissan Joseph & Alex Thevaranjan, 1998. "Monitoring and Incentives in Sales Organizations: An Agency-Theoretic Perspective," Marketing Science, INFORMS, vol. 17(2), pages 107-123.
- Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
- Rajiv Lal & Richard Staelin, 1986. "Salesforce Compensation Plans in Environments with Asymmetric Information," Marketing Science, INFORMS, vol. 5(3), pages 179-198.
When requesting a correction, please mention this item's handle: RePEc:kap:qmktec:v:3:y:2005:i:1:p:5-39. 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: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.