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

Discussion of A Dynamic Structural Model of Sales Force Response to Compensation Plans. Ram Rao. Research Goals. Analyze effect of compensation plan on performance Dynamic Structural Model Invoke new estimation methodologies Obtain more “reliable” estimates Can quotas help?

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

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  1. Discussion of A Dynamic Structural Model of Sales Force Response to Compensation Plans Ram Rao

  2. 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?

  3. Practical Issues • Risk Aversion • Salary needed, pure commissions won’t work • Sales need to be coordinated with production etc. • Need to forecast • Salespersons are not all similar • Heterogeneity

  4. 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

  5. Theory vs. Practice “Overachievement” commissions Optimal non-linear plan Authors’ plan F Bonus SALESPERSON EARNINGS Commissions Salary SALES

  6. 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

  7. 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%

  8. 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

  9. 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?

  10. WHAT IS THERE TO NOT LIKE ABOUT SUCH NICE WORK? UNLESS YOU ARE A REVIEWER FOR A PRESTIGIOUS JOURNAL

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