Salesforce Compensation Plans: An Empirical Test of the Agency Theory Framework

By Rajiv LalRichard LambertDonald OutlandRichard Staelin
1990| Working Paper No. 1089

A series of recent papers have attempted to investigate the issue of how to compensate a salesforce using the agency theory paradigm. These investigations hypothesize various factors to affect the form of the compensation plan defined in terms of salary and incentive pay and offer predictions about how the compensation plan changes with changes in these factors. In this paper we attempt to confront these predictions with data gathered from a major computer manufacturer. Our study offers significant overall support for these hypotheses. The data suggests that salary and its proportion in the total compensation package increases with an increase in the sales manager’s perceptions of the importance of team selling and customer service and the level of uncertainty in making a sale; and decreases with an increase in the importance of advertising, the quality of the product and the effectiveness of the salesperson in making a sale. In two cases where the hypotheses are not supported, the effect is found to be statistically insignificant.