Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans
Harvard Business School - Marketing Unit
Thomas J. Steenburgh
University of Virginia - Darden Graduate School of Business
Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation
August 13, 2013
Harvard Business School Marketing Unit Working Paper No. 13-066
We estimate a dynamic structural model of sales force response to a bonus based compensation plan. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find evidence that: (1) bonuses enhance productivity across all segments; (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas; and (3) quarterly bonuses help improve performance of the weak performers by serving as pacers to keep the sales force on track to achieve their annual sales quotas. The paper also introduces two main methodological innovations to the marketing literature: First, we implement empirically the method proposed by Arcidiacono and Miller (2011) to accommodate unobserved latent class heterogeneity using a computationally light two-step estimator. Second, we illustrate how discount factors can be estimated in a dynamic structural model using field data through a combination of (1) an exclusion restriction separating current and future payoff and (2) a finite horizon model in which there is no forward looking behavior in the last period.
Number of Pages in PDF File: 44
Keywords: Sales force compensation, bonuses, quotas, dynamic structural models, two step estimation, discount factors
JEL Classification: L23, L14
Date posted: October 19, 2009 ; Last revised: August 14, 2013
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