Salesforce Compensation Plans in Environments with Asymmetric Information

1984| Working Paper No. 781

In this paper, we present a theory of salesforce compensation plans to explain the type of plans implemented by IBM and St. Regis Paper where the members of the salesforce are provided an opportunity to choose a compensation scheme from a menu of contracts offered by the firm. We model this interaction in an agency-theory framework, as in Basu, Lal, Srinivasan and Staelin (1984), but relax the assumptions of information symmetry and salesforce homogeneity to demonstrate the optimality of such compensation plans. We also show that even when these assumptions are relaxed there are situations where the plans characterized by Basu, Lal, Srinivasan and Staelin (1984) are still optimal.