Discussion of A Dynamic Structural Model of Sales Force Response to Compensation Plans

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Discussion of A Dynamic Structural Model of
Sales Force Response to Compensation Plans

• Ram Rao

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Research Goals

• Analyze effect of compensation plan on
  performance
• Dynamic Structural Model
• Invoke new estimation methodologies
• Obtain more reliable estimates
• Can quotas help?
• Quarterly quotas, like pacers
• And how about overachievement commissions?

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Practical Issues

• Risk Aversion
• Salary needed, pure commissions wont work
• Sales need to be coordinated with production etc.
• Need to forecast
• Salespersons are not all similar
• Heterogeneity

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What does theory have to say?

• Risk Aversion
• Commission rates must be increasing in output
• Forecast
• Salespersons must share information and work
  with (self-imposed) targets (quotas)
• Heterogeneity
• Quotas must vary across salespersons

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Theory vs. Practice
Overachievement commissions
Optimal non-linear plan
Authors plan F
Bonus
SALESPERSON EARNINGS
Commissions
Salary
SALES
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What is being estimated?And how?

• Sales response
• Think of them as sensitivity to exogenous
  variables AND state variables, primarily how near
  salesperson is to quota
• EM with latent class
• Salesperson disutility for effort
• Simulation, assuming salespersons are optimizers

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What do we learn from counterfactuals (pure
commission)?

• Current plan is best! 23, 15
• Removing overachievement commissions naturally
  makes exceeding quota to be undesirable, educing
  early period effort to control likelihood of
  exceeding. Revenues and profits 5
• Quarterly quotas AND bonus keep performance high
  23

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My take

• Why might quarterly bonuses work?
• If salesperson is risk averse they might prefer a
  more certain outcome with small payoff
• My rough calculation tells me
• Pr (miss all three quarterly bonus) 1/8
• Pr (miss annual bonus) 1/2
• The two events are not independent, but my point
  may be right

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Behavioral Stuff

• May be salespersons need pacers
• Students do
• Measurements and feedback are known to improve
  performance in many fields
• Ratcheting is problematic
• Is there no room for negotiations between
  salesperson and manager?
• You have to wonder why managers are paid more?

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