A Structural Model of Sales-Force Compensation Dynamics: Estimation and Field Implementation

56 Pages Posted: 18 Sep 2009 Last revised: 17 Feb 2011

See all articles by Sanjog Misra

Sanjog Misra

University of Chicago - Booth School of Business

Harikesh Nair

Stanford University - Graduate School of Business

Date Written: September 16, 2009

Abstract

We present an empirical framework to analyze real-world sales-force compensation schemes. The model is flexible enough to handle quotas and bonuses, output-based commission schemes, as well as "ratcheting" of compensation based on past performance, all of which are ubiquitous in actual contracts. The model explicitly incorporates the dynamics induced by these aspects in agent behavior. We apply the model to a rich dataset that comprises the complete details of sales and compensation plans for a set of 87 sales-people for a period of 3 years at a large contact-lens manufacturer in the US. We use the model to evaluate profit- improving, theoretically-preferred changes to the extant compensation scheme. These recommendations were then implemented at the focal firm. Agent behavior and output under the new compensation plan is found to change as predicted. The new plan resulted in a 9% improvement in overall revenues, which translates to about $0.98 million incremental revenues per month, indicating the success of the field-implementation. The results bear out the face validity of dynamic agency theory for real-world compensation design. More generally, our results fit into a growing literature that illustrates that dynamic programming-based solutions, when combined with structural empirical specifications of behavior, can help significantly improve marketing decision-making, and firms’profitability.

Keywords: Marketing Implemetation, econometrics, sales force compensation, agency theory, sales force compensation, marketing strategy, market research, dynamic programming, marketing management, market research, stochastic modeling

JEL Classification: C25, C61, D91, L11, L12, L16, L68, M31

Suggested Citation

Misra, Sanjog and Nair, Harikesh, A Structural Model of Sales-Force Compensation Dynamics: Estimation and Field Implementation (September 16, 2009). Stanford University Graduate School of Business Research Paper No. 2037; Simon School Working Paper No. FR 09-26. Available at SSRN: https://ssrn.com/abstract=1474462 or http://dx.doi.org/10.2139/ssrn.1474462

Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

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