Salesforce Compensation Plans: An Individual Level Analysis

By Rajiv LalRichard Staelin
1991| Working Paper No. 1176

A series of recent analytic papers have investigated the issue of how to compensate a salesforce using either the agency theory paradigm or transaction cost analysis. Similarly other more descriptive investigations have led to practical guidelines for managing compensation plans (Smyth 1968). These two approaches are difficult to reconcile since there is no direct mapping between the more managerially relevant independent variables used in the descriptive literature and the more abstract variables used in the analytic frame-works. While several empirical studies have focused on the predictions of the analytical frameworks, in this paper we test the guidelines provided in the descriptive literature, as in Smyth (1968). Our study is unique in that it uses cross-sectional data at the individual level in relating the effect of various independent variables to salesperson specific compensation plans. Although, our results support many of the guidelines suggested by Smyth, we do not find support for his guidelines that: the proportion of incentive pay should decrease if the company places more reliance on advertising or if the company has a quality advantage over its competitors. Finally, we use the agency theory framework to rationalize our findings with respect to reliance on advertising and existence of quality advantage as it effects the proportion of incentive pay._x000B_