Multi-dimensional Salesforce Compensation with Price Delegation

Abstract

In settings where prices are delegated to salespeople, firms may provide salespeople incentives to not only sell more, but to do so at higher margins. In fact, the profitability of price delegation could hinge on the design of incentives. In this paper, we study the relative importance of sales and margin-based incentives and their influence on the profitability of price delegation. Utilizing data from a large durable goods retailer in the U.S., we outline and estimate a structural model of a multi-tasking salesforce where salespeople jointly make selling and pricing decisions for multiple product types. We find that the cost of selling effort varies by product type, and the cost of pricing effort is of the same order of magnitude as that of selling effort. Eliminating margin-based (sales) incentives lowers the retailer's profit by 21% (7%) pointing to the relative importance of the margin-based incentives. Crucially, we find that price delegation is more profitable than fixed pricing but only when the retailer offers margin-based incentives.

Keywords: salesforce compensation, price delegation, pricing, multitasking

JEL Classification: D4, C7, L1, J24