Compensation and Peer Effects in Competing Sales Teams

Abstract

This paper examines how compensation systems impact peer effects and competition in collocated sales teams. We use department store sales data to show that compensation systems influence worker incentives to help and compete with peers within and across firms, which in turn changes how coworker ability impacts worker performance. We find that high-ability workers improve peer productivity under team-based compensation while hurting peers under individual-based compensation. We also document peer effects across firm boundaries that depend on compensation system and impact market competition, and identify how compensation influences workers’ strategic responses to peers through discretionary price discounting. We further exploit compensation changes by two firms to discount alternative explanations of endogenous compensation choice and hiring. Our results suggest that heterogeneity in worker ability enhances team performance under team-based compensation while hurting individual-based firms, and that peer interactions are a critical component in understanding firm performance and market competition.

Keywords: peer effects, social influence, compensation, sales force, marketing