Optimal sales force compensation

Kräkel, Matthias; Schöttner, Anja

doi:10.1016/j.jebo.2016.03.015

Cited by 25 publications

(14 citation statements)

References 34 publications

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“…Bierbaum (2002) studies how to induce high effort from the agent in each of two periods (which may not be profit maximizing for the principal), whereas we allow different effort profiles to be induced by the optimal contracts under different conditions. Kräkel and Schöttner (2016) study the firm’s choice between commissions and bonuses and determines conditions under which one or the other (or a combination) is optimal in a dynamic setting involving a special case when an agent’s outside option is equal to his limited liability. Schöttner (2016) studies optimal contracting when the agent’s effort costs change over time.…”

Section: Introductionmentioning

confidence: 99%

Multiperiod Contracting and Salesperson Effort Profiles: The Optimality of “Hockey Stick,” “Giving Up,” and “Resting on Laurels”

Jerath¹,

Long²

2020

Journal of Marketing Research

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The authors study multiperiod sales force incentive contracting in which salespeople can engage in effort gaming, a phenomenon that has extensive empirical support. Focusing on a repeated moral hazard scenario with two independent periods and a risk-neutral agent with limited liability, the authors conduct a theoretical investigation to understand which effort profiles the firm can expect under the optimal contract. The authors show that various effort profiles that may give the appearance of being suboptimal, such as postponing effort exertion (“hockey stick”) and not exerting effort after a bad or a good initial demand outcome (“giving up” and “resting on laurels,” respectively) may indeed be induced optimally by the firm. This is because, under certain conditions that depend on how severe the contracting frictions are and how effective effort exertion is in increasing demand, the firm wants to concentrate rewards on extreme demand outcomes. Doing this induces gaming and reduces expected demand but also makes motivating effort cheaper, thus saving on incentive payments. On introducing dependence between time periods, such as when the agent can transfer demands between periods, this insight continues to hold and, furthermore, “hockey stick,” “giving up,” and “resting on laurels” can be optimal for the firm even under repeated short time horizon contracting. The results imply that one must carefully consider the setting and environmental factors when making inferences about contract effectiveness from dynamic effort profiles of agents.

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Section: Introductionmentioning

confidence: 99%

Multiperiod Contracting and Salesperson Effort Profiles: The Optimality of “Hockey Stick,” “Giving Up,” and “Resting on Laurels”

Jerath¹,

Long²

2020

Journal of Marketing Research

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“…Regulations should elimate predatory lending practices and ensure that loans are qualified properly so that borrowers have a reasonable chance of maintaining and replaying the loan. Financial institution must audit and moderate incentive programs for executives, management, and sales personnel which have powerful effects employee behavior (Kräkel &Schöttnerb, 2016). Specifically, financial institutions need to clarify the roles of customer and stakeholders and make sure the incentives align with customer interests and there is no conflict of interest with customers and stakeholders (Chatterje, Narayan, and Malek, 2016).…”

Section: Discussionmentioning

confidence: 99%

Lessons Learned in Management, Marketing, Sales, and Finance Incentive Practices a Decade after the Subprime Mortgage Crisis

Thomas¹

2017

IJBM

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The subprime mortgage crisis was the most devastating financial crisis since the Great Depression. The steady rise of housing purchases and seemingly limitless increase in home values drew many investors to the United States real estate market. The business growth in this sector was so compelling that financial firms created new secondary markets that were perceived as diversifying risk, which in turn prompted lenders to create innovative funding vehicles and loose and fast loan qualification processes. The federal government was ill prepared to deal with this shift in the financial world to market-based demand, and the results were disastrous. Lenders embraced predatory lending practices, borrowers with bad credit overextended themselves beyond their means, and foreclosures occurred at startling rates as home values plummeted, resulting in a world-wide economic depression. Ten years later, we reflect on the events that led up to and caused the subprime mortgage crisis for lessons learned to improve management, marketing, and finance incentive practices.

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“…Despite being different across periods, the sales probabilities are taken as constant. Kräkel and Schöttner (2016) consider a two-period model with binary effort choices and analyze the optimal contracts. They also study a case where the second-period sales opportunity randomly depends on the outcome of the first period with exogenous probabilities.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Although these papers explore various configurations of the uncertainty structure, the probability of observing a favorable outcome in their models is fixed (Schöttner 2016) or exogenously depends on the outcome in the first period (Kräkel andSchöttner 2016, Schmitz 2005). By contrast, the outcomes in the first period endogenously determine the probability of success in the second period in our setup.…”

Section: Literature Reviewmentioning

confidence: 99%