Quota-Based Compensation Plans for Multi-Territory Heterogeneous Salesforces

A quota plan pays a fixed salary which is supplemented by commission income that is a prespecified fraction of the dollar sales that exceed the quota. For a salesforce comprised of multiple salespersons/territories, the commission rate and salary remain the same across salespersons; however, quotas vary across salespersons/territories. Compared to the optimal curvilnear agency-theory-based plan that is individually tailored to each salesperson/territory, the quota-based plan’s total nonoptimality (in profit terms) has two components: (i) a shpare-induced nonoptimality arising from the fact that the quota-based plan, and (ii) a heterogeneity- induced nonoptimality arising from the fact that the salary and commission rate in the quota plan are constrained to be the same across the salesforce. Our numerical experiments indicate that the total nonoptimality is merely about 1% for the parametric scenarios studied. The quota-based plan is simpler to implement than the curvilinear agency-theory-based plan. Furthermore, changes in business conditions in a territory, or the transfer of a salesperson from one territory to another, can be accomodated by changing only the quota, without having to change the salary and the commission rate structure. Such advantages, together with the result that the nonoptimality is slight, may explain the prevalence of quota-based plans. We also provide directional guidelines in terms of how the quota should vary as a function of salesperson and territory characteristics.