Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

44 Pages Posted: 19 Oct 2009 Last revised: 14 Aug 2013

Doug Chung

Harvard Business School - Marketing Unit

Thomas J. Steenburgh

University of Virginia - Darden Graduate School of Business

K. Sudhir

Yale School of Management; Yale University-Department of Economics; Yale University - Cowles Foundation

Date Written: August 13, 2013

Abstract

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.

Keywords: Sales force compensation, bonuses, quotas, dynamic structural models, two step estimation, discount factors

JEL Classification: L23, L14

Suggested Citation

Chung, Doug and Steenburgh, Thomas J. and Sudhir, K., Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans (August 13, 2013). Harvard Business School Marketing Unit Working Paper No. 13-066. Available at SSRN: https://ssrn.com/abstract=1491283 or http://dx.doi.org/10.2139/ssrn.1491283

Doug Chung

Harvard Business School - Marketing Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Thomas J. Steenburgh

University of Virginia - Darden Graduate School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

K. Sudhir (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-3289 (Phone)
203-432-3003 (Fax)

Yale University-Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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