The Incentive and Selection Roles of Sales Force Compensation Contracts

Journal of Marketing Research, volume XLVIII, August 2011, 781-798

Posted: 7 Jun 2013

See all articles by Desmond (Ho-Fu) Lo

Desmond (Ho-Fu) Lo

Santa Clara University, Department of Marketing

Mrinal Ghosh

University of Arizona, Department of Marketing

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Date Written: August 1, 2011

Abstract

Designing compensation plans with an appropriate level of incentives is a key decision faced by managers of direct sales forces. The authors use data on individual salesperson compensation contracts to show that firms design their pay plans to both discriminatingly select, (i.e., attract and retain), salespeople and provide them with the right level of incentives. Consistent with standard agency arguments, the authors find that firms use higher-powered incentives as the importance of agent effort increases. At the same time, the authors find strong support for the selection role of these contracts. Specifically, agents with greater selling ability and lower risk aversion are associated with jobs offering higher-powered incentives. Finally, consistent with prior findings on incentive contracts, the authors find no support for the insurance implication of the typical agency model. The authors rule out alternative explanations for this anomalous result, and find that the selection role of contracts best explains the result in their context.

Keywords: sales force compensation, agency theory, incentives, selection, retention, survey research

JEL Classification: D23, D82, L22, M31, M52

Suggested Citation

Lo, Desmond (Ho-Fu) and Ghosh, Mrinal and Lafontaine, Francine, The Incentive and Selection Roles of Sales Force Compensation Contracts (August 1, 2011). Journal of Marketing Research, volume XLVIII, August 2011, 781-798, Available at SSRN: https://ssrn.com/abstract=2275356

Desmond (Ho-Fu) Lo

Santa Clara University, Department of Marketing ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

HOME PAGE: http://www.scu.edu/business/marketing/faculty/lo.cfm

Mrinal Ghosh

University of Arizona, Department of Marketing ( email )

Tucson, AZ 85721-0108
United States

Francine Lafontaine (Contact Author)

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-647-4915 (Phone)
734-936-0279 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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