IDEAS home Printed from https://ideas.repec.org/a/kap/qmktec/v9y2011i3p211-257.html
   My bibliography  Save this article

A structural model of sales-force compensation dynamics: Estimation and field implementation

Author

Listed:
  • Sanjog Misra

    ()

  • Harikesh Nair

    ()

Abstract

We present an empirical framework to analyze real-world sales-force compensation schemes. The model is flexible enough to handle quotas and bonuses, output-based commission schemes, as well as "ratcheting" of compensation based on past performance, all of which are ubiquitous in actual contracts. The model explicitly incorporates the dynamics induced by these aspects in agent behavior. We apply the model to a rich dataset that comprises the complete details of sales and compensation plans for a set of 87 sales-people for a period of 3 years at a large contact-lens manufacturer in the US. We use the model to evaluate profit- improving, theoretically-preferred changes to the extant compensation scheme. These recommendations were then implemented at the focal firm. Agent behavior and output under the new compensation plan is found to change as predicted. The new plan resulted in a 9% improvement in overall revenues, which translates to about $0.98 million incremental revenues per month, indicating the success of the field-implementation. The results bear out the face validity of dynamic agency theory for real-world compensation design. More generally, our results fit into a growing literature that illustrates that dynamic programming-based solutions, when combined with structural empirical specifications of behavior, can help significantly improve marketing decision-making, and firms' profitability.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Sanjog Misra & Harikesh Nair, 2011. "A structural model of sales-force compensation dynamics: Estimation and field implementation," Quantitative Marketing and Economics (QME), Springer, vol. 9(3), pages 211-257, September.
  • Handle: RePEc:kap:qmktec:v:9:y:2011:i:3:p:211-257
    DOI: 10.1007/s11129-011-9096-1
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11129-011-9096-1
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cho, Sungjin & Rust, John, 2008. "Is econometrics useful for private policy making? A case study of replacement policy at an auto rental company," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 243-257, July.
    2. Doug J. Chung & Thomas Steenburgh & K. Sudhir, 2014. "Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans," Marketing Science, INFORMS, vol. 33(2), pages 165-187, March.
    3. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
    4. Thomas Steenburgh, 2008. "Effort or timing: The effect of lump-sum bonuses," Quantitative Marketing and Economics (QME), Springer, vol. 6(3), pages 235-256, September.
    5. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 917-962.
    6. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 149-185.
    7. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, September.
    8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    9. Kaplan, Robert S., 1985. "Evidence on the effect of bonus schemes on accounting procedure and accrual decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 109-113, April.
    10. V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 497-529.
    11. Adam Copeland & Cyril Monnet, 2009. "The Welfare Effects of Incentive Schemes," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 93-113.
    12. Christopher Ferrall & Bruce Shearer, 1999. "Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 309-338.
    13. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-431, July.
    14. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    15. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    16. Harikesh Nair, 2007. "Intertemporal price discrimination with forward-looking consumers: Application to the US market for console video-games," Quantitative Marketing and Economics (QME), Springer, vol. 5(3), pages 239-292, September.
    17. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    18. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    19. Rust, John, 1996. "Numerical dynamic programming in economics," Handbook of Computational Economics,in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 14, pages 619-729 Elsevier.
    20. Courty, Pascal & Marschke, Gerald, 1997. "Measuring Government Performance: Lessons from a Federal Job-Training Program," American Economic Review, American Economic Association, vol. 87(2), pages 383-388, May.
    21. Pradeep Bhardwaj, 2001. "Delegating Pricing Decisions," Marketing Science, INFORMS, vol. 20(2), pages 143-169, September.
    22. Li, Tong & Vuong, Quang, 1998. "Nonparametric Estimation of the Measurement Error Model Using Multiple Indicators," Journal of Multivariate Analysis, Elsevier, vol. 65(2), pages 139-165, May.
    23. Thomas N. Hubbard, 2003. "Information, Decisions, and Productivity: On-Board Computers and Capacity Utilization in Trucking," American Economic Review, American Economic Association, vol. 93(4), pages 1328-1353, September.
    24. David Godes, 2003. "In the Eye of the Beholder: An Analysis of the Relative Value of a Top Sales Rep Across Firms and Products," Marketing Science, INFORMS, vol. 22(2), pages 161-187, May.
    25. Todd R. Zenger & Sergio G. Lazzarini, 2004. "Compensating for innovation: Do small firms offer high-powered incentives that lure talent and motivate effort?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(6-7), pages 329-345.
    26. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    27. Oyer, Paul, 2000. "A Theory of Sales Quotas with Limited Liability and Rent Sharing," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 405-426, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Ryan & Catherine Tucker, 2012. "Heterogeneity and the dynamics of technology adoption," Quantitative Marketing and Economics (QME), Springer, vol. 10(1), pages 63-109, March.
    2. Sanjay Jain, 2012. "Self-Control and Incentives: An Analysis of Multiperiod Quota Plans," Marketing Science, INFORMS, vol. 31(5), pages 855-869, September.
    3. Minkyung Kim & K. Sudhir & Kosuke Uetake & Rodrigo Canales, 2016. "Multidimensional Sales Incentives in CRM Settings: Customer Adverse Selection and Moral Hazard," Cowles Foundation Discussion Papers 2085, Cowles Foundation for Research in Economics, Yale University.
    4. Aviv Nevo & John L. Turner & Jonathan W. Williams, 2016. "Usage‐Based Pricing and Demand for Residential Broadband," Econometrica, Econometric Society, vol. 84, pages 411-443, March.
    5. John Rust, 2014. "The Limits of Inference with Theory: A Review of Wolpin (2013)," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 820-850, September.
    6. Pradeep K. Chintagunta & Harikesh S. Nair, 2011. "Structural Workshop Paper --Discrete-Choice Models of Consumer Demand in Marketing," Marketing Science, INFORMS, vol. 30(6), pages 977-996, November.
    7. Minkyung Kim & K. Sudhir & Kosuke Uetake & Rodrigo Canales, 2018. "When Salespeople Manage Customer Relationships: Multidimensional Incentives and Private Information," Cowles Foundation Discussion Papers 2122, Cowles Foundation for Research in Economics, Yale University.
    8. Jean-Pierre Dubé & Sanjog Misra, 2017. "Scalable Price Targeting," NBER Working Papers 23775, National Bureau of Economic Research, Inc.
    9. Xavier d'Haultfoeuille & Philippe Février, 2011. "The Provision of Wage Incentives : A Structural Estimation Using Contracts Variation," Working Papers 2011-29, Center for Research in Economics and Statistics.
    10. Thomas Otter & Timothy J. Gilbride & Greg M. Allenby, 2011. "Testing Models of Strategic Behavior Characterized by Conditional Likelihoods," Marketing Science, INFORMS, vol. 30(4), pages 686-701, July.
    11. Parag A. Pathak & Peng Shi, 2017. "How Well Do Structural Demand Models Work? Counterfactual Predictions in School Choice," NBER Working Papers 24017, National Bureau of Economic Research, Inc.
    12. 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.
    13. V. Kumar & S. Sriram & Anita Luo & Pradeep K. Chintagunta, 2011. "Assessing the Effect of Marketing Investments in a Business Marketing Context," Marketing Science, INFORMS, vol. 30(5), pages 924-940, September.
    14. Steven Lu & Andre Bonfrer & Ranjit Voola, 2015. "Retaining Talented Salespeople," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(2), pages 148-164, June.
    15. Praveen K. Kopalle & Yacheng Sun & Scott A. Neslin & Baohong Sun & Vanitha Swaminathan, 2012. "The Joint Sales Impact of Frequency Reward and Customer Tier Components of Loyalty Programs," Marketing Science, INFORMS, vol. 31(2), pages 216-235, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:qmktec:v:9:y:2011:i:3:p:211-257. 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). General contact details of provider: http://www.springer.com .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.