Homogeneous Contracts for Heterogeneous Agents: Aligning Sales Force Composition and Compensation

Abstract

Observed contracts in the real world are often very simple, which partly reflects the constraints faced by contracting firms in making the contracts more complex. In this article, the authors focus on one such rigidity: the constraints faced by firms in fine-tuning contracts to the full distribution of heterogeneity of their employees. The authors explore the implication of these constraints for the provision of incentives within the firm. The study's application is to sales force compensation, wherein a firm maintains a sales force to market its products. Consistent with ubiquitous real-world business practice, the study assumes that a firm is restricted to fully or partially set uniform commissions across its agent pool. The authors show that this restriction implies an interaction between the composition of agent types in the contract and the compensation policy used to motivate them, leading to a “contractual externality” in the firm and generating gains to sorting. This article explains how this contractual externality arises; discusses a practical approach to endogenizing agents and incentives at a firm in its presence; and presents an empirical application to sales force compensation contracts at a U.S. Fortune 500 company that explores these considerations and assesses the gains from a sales force architecture that sorts agents into divisions to balance firmwide incentives. Empirically, the authors find that the restriction to homogeneous plans significantly reduces a firm's payoff, relative to a fully heterogeneous plan, when the firm is unable to optimize the composition of its agents. However, a firm's payoff under a homogeneous plan comes very close to that under a fully heterogeneous plan when the firm can optimize both composition and compensation. Thus, in the empirical setting of this study, the ability to choose agents mitigates the loss in incentives from the restriction to uniform contracts. The authors conjecture this result may hold more broadly.

Self-Selected Sales Incentives: Evidence of their Effectiveness, Persistence, Durability, and Underlying Mechanisms

“…Marketers worldwide use sophisticated segmentation techniques to better understand customers and design segment-specific marketing strategies to achieve superior financial performance (Kumar and Reinartz 2016). However, the same segmentation knowledge has not been applied to sales force management: although sales forces are often very heterogeneous, most incentive plans today treat the members of a sales force as a homogeneous entity (Daljord, Misra, and Nair 2016). We thus encourage firms to more actively exploit the heterogeneity of their sales forces—for instance, through applying heterogeneous incentivizing approaches, such as the self-selected incentive scheme, and experimenting with them (e.g., by starting small-scale pilots).…”

“…The first category comprises empirical research on sales force incentives. As Daljord, Misra, and Nair (2016) have recently pointed out, in closely examining current managerial practice, this line of research has mainly scrutinized homogeneous incentives and has identified a couple of contingency factors that moderate their influence (Chung, Steenburgh, and Sudhir 2014; Hohenberg and Homburg 2016). The second category consists of analytical research on sales force incentives.…”

“…The self-selected incentive scheme differs in three important ways from systems of assigned quotas with several tiers, which currently prevail in practice (Daljord, Misra, and Nair 2016; World at Work 2015). First, under the self-selected incentive scheme, sales employees receive from their firms multiple individualized goal–reward level combinations that are calculated for each employee on the basis of his or her past performance.…”

Impact of religiosity and culture on salesperson job satisfaction and performance

“…For example, salespeople on commission compared with those on fixed salary face more uncertainties and bear more risk. The very heterogeneity in salespeople's pay leads to perceptions of greater uncertainty (Daljord et al, 2016). These uncertainties are particularly distressing for people who live in cultures with high uncertainty avoidance.…”

Two essays on new B2B sales incentive mechanisms for enhancing selling effectiveness and coordinating inside and outside sales forces

“…Second, as already noted, enhancing selling effectiveness is critical today and it is input activities that hone effectiveness that need to be stimulated. However, almost without exception, the previous PA literature (Basu et al 1985, Lal and Srinivasan 1993, Mantrala et al 1994, Albers 1996, Raju and Srinivasan 1996, Mishra and Prasad 2004, Daljord et al 2016) assumes individual reps' selling effectiveness is constant or fixed, and focus on motivating reps to increase quantity of work (e.g., number of selling hours). Thus, this literature, by and large, has ignored the many empirical studies over the same period of time that have shown that a salesperson's selling effectiveness is variable and adaptable (Sujan et al 1994, Rapp et al 2006, Fang et al 2008 and can be improved via behavior-based control mechanisms (Anderson and Oliver 1987, Cravens et al 1993, Oliver and Anderson 1994.…”