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Optimal Sales Force Compensation

  • Matthias Kräkel

    ()

    (Institute for Applied Microeconomics, Business Administration, University of Bonn, Germany)

  • Anja Schöttner

    ()

    (Department of Economics, University of Konstanz, Germany)

We analyze a dynamic moral-hazard model to derive optimal sales force compensation plans without imposing any ad hoc restrictions on the class of feasible incentive contracts. We explain when the compensation plans that are most common in practice - fixed salaries, quota-based bonuses, commissions, or a combination thereof - are optimal. Fixed salaries are optimal for small revenue-cost ratios. Quota-based bonuses (commissions) should be used if the revenue-cost ratio takes intermediate (large) values. If firms face demand uncertainty, markets are rather thin, and the revenue-cost ratio large, firms should combine a commission with a quota-based bonus. If word-of-mouth advertising affects sales, a dynamic commission that increases over time can be optimal. When entering a new market or launching a new product, firms should install long-term bonus plans.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2014-09.

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Length: 44 pages
Date of creation: 14 Apr 2014
Date of revision:
Handle: RePEc:knz:dpteco:1409
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