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Salesforce Compensation with Inventory Considerations

Tinglong Dai

Johns Hopkins University - Carey Business School (JHU)

Kinshuk Jerath

Columbia University - Columbia Business School

December 20, 2012

We study a scenario in which a firm designs the compensation contract for a salesperson who exerts effort to increase the level of uncertain demand and, jointly, the firm also decides the level of inventory to be stocked. We use a newsvendor-type model in which actual sales depend on the realized demand but are limited by the inventory available, and unfulfilled demand cannot be observed. Our study provides a number of surprising insights for both salesforce compensation and inventory management, attributable to the interplay between them. With regard to the compensation contract of the salesperson, we find that the presence of inventory considerations can lead to the firm choosing a higher-powered incentive contract as compared to the situation in which inventory considerations are absent. Interestingly, increasing demand uncertainty leads to a higher-powered contract for the salesperson. With regard to inventory management, we find that, to increase the observability of the effort of the salesperson, the firm can find it optimal to over-stock inventory compared to the first-best level, and this happens only when inventory cost is in a medium range. We also obtain other interesting results. For instance, as the cost of inventory increases, the firm may pay the salesperson a larger reward for clearing a lower level of inventory.

Number of Pages in PDF File: 31

Keywords: salesforce compensation, inventory, marketing-operations interface

JEL Classification: M31, M11

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Date posted: December 23, 2012  

Suggested Citation

Dai, Tinglong and Jerath, Kinshuk, Salesforce Compensation with Inventory Considerations (December 20, 2012). Available at SSRN: https://ssrn.com/abstract=2193376 or http://dx.doi.org/10.2139/ssrn.2193376

Contact Information

Tinglong Dai
Johns Hopkins University - Carey Business School (JHU) ( email )
100 International Drive
Baltimore, MD 21202
United States
Kinshuk Jerath (Contact Author)
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States

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