IDEAS home Printed from https://ideas.repec.org/a/bla/popmgt/v29y2020i1p62-71.html
   My bibliography  Save this article

Technical Note: Optimal Salesforce Compensation with Supply–Demand Mismatch Costs

Author

Listed:
  • Binqing Xiao
  • Wenqiang Xiao

Abstract

In this study, we characterize the optimal compensation scheme for a firm that sells a single product with a limited stocking quantity through a sales agent. Our focus is on understanding how the supply–demand mismatch costs affect the firm’s optimal compensation scheme. There are two main findings. First, under the deterministic demand response, the classical optimality result of the convex increasing compensation scheme breaks with the consideration of supply–demand mismatch costs. Instead, the optimal compensation is S‐shaped under certain conditions. Second, under the stochastic demand response, the classical optimality result of the menu of linear compensation schemes fails to hold with the consideration of supply–demand mismatch costs. Instead, the optimal compensation schemes consist of a menu of linear compensation coupled with a penalty of the agent’s forecast error.

Suggested Citation

  • Binqing Xiao & Wenqiang Xiao, 2020. "Technical Note: Optimal Salesforce Compensation with Supply–Demand Mismatch Costs," Production and Operations Management, Production and Operations Management Society, vol. 29(1), pages 62-71, January.
    • Handle: RePEc:bla:popmgt:v:29:y:2020:i:1:p:62-71
    DOI: 10.1111/poms.13096
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/poms.13096
    Download Restriction: no
    File URL: https://libkey.io/10.1111/poms.13096?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    3. Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
    4. Neda Ebrahim Khanjari & Seyed Iravani & Hyoduk Shin, 2014. "The Impact of the Manufacturer-Hired Sales Agent on a Supply Chain with Information Asymmetry," Manufacturing & Service Operations Management, INFORMS, vol. 16(1), pages 76-88, February.
    5. Leon Yang Chu & Guoming Lai, 2013. "Salesforce Contracting Under Demand Censorship," Manufacturing & Service Operations Management, INFORMS, vol. 15(2), pages 320-334, May.
    6. Tinglong Dai & Kinshuk Jerath, 2013. "Salesforce Compensation with Inventory Considerations," Management Science, INFORMS, vol. 59(11), pages 2490-2501, November.
    7. Chu, Leon Yang & Sappington, David E.M., 2009. "Procurement contracts: Theory vs. practice," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 51-59, January.
    8. Oyer, Paul, 2000. "A Theory of Sales Quotas with Limited Liability and Rent Sharing," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 405-426, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yang, Xiaolin & Gou, Qinglong & Wang, Xin & Zhang, Juzhi, 2022. "Does bonus motivate streamers to perform better? An analysis of compensation mechanisms for live streaming platforms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).
    2. Zhaolin Li & Samuel N. Kirshner, 2021. "Salesforce Compensation and Two‐Sided Ambiguity: Robust Moral Hazard with Moment Information," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 2944-2961, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Panos Kouvelis & Duo Shi, 2020. "Who Should Compensate the Sales Agent in a Distribution Channel?," Production and Operations Management, Production and Operations Management Society, vol. 29(11), pages 2437-2460, November.
    2. Kräkel, Matthias & Schöttner, Anja, 2016. "Optimal sales force compensation," Journal of Economic Behavior & Organization, Elsevier, vol. 126(PA), pages 179-195.
    3. Shan Li & Kay-Yut Chen & Ying Rong, 2020. "The Behavioral Promise and Pitfalls in Compensating Store Managers," Management Science, INFORMS, vol. 66(10), pages 4899-4919, October.
    4. Jian Chen & He Huang & Liming Liu & Hongyan Xu, 2021. "Price Delegation or Not? The Effect of Heterogeneous Sales Agents," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1350-1364, May.
    5. Anja Schöttner, 2017. "Optimal Sales Force Compensation in Dynamic Settings: Commissions vs. Bonuses," Management Science, INFORMS, vol. 63(5), pages 1529-1544, May.
    6. Tinglong Dai & Kinshuk Jerath, 2019. "Salesforce Contracting Under Uncertain Demand and Supply: Double Moral Hazard and Optimality of Smooth Contracts," Marketing Science, INFORMS, vol. 38(5), pages 852-870, September.
    7. Long Gao, 2023. "Optimal Incentives for Salespeople with Learning Potential," Management Science, INFORMS, vol. 69(6), pages 3285-3296, June.
    8. Arzum Akkaş & Nachiketa Sahoo, 2020. "Reducing Product Expiration by Aligning Salesforce Incentives: A Data‐driven Approach," Production and Operations Management, Production and Operations Management Society, vol. 29(8), pages 1992-2009, August.
    9. Pedro Ortín‐Ángel & Vicente Salas‐fumás, 1998. "Agency‐Theory and Internal‐Labor‐Market Explanations of Bonus Payments: Empirical Evidence from Spanish Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 573-613, December.
    10. Kuhn, Peter J. & Yu, Lizi, 2021. "Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams," IZA Discussion Papers 14115, Institute of Labor Economics (IZA).
    11. Escobar, Juan F. & Pulgar, Carlos, 2017. "Motivating with simple contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 192-214.
    12. Ulbricht, Robert, 2016. "Optimal delegated search with adverse selection and moral hazard," Theoretical Economics, Econometric Society, vol. 11(1), January.
    13. Leon Yang Chu & David E.M. Sappington, 2009. "Implementing high‐powered contracts to motivate intertemporal effort supply," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 296-316, June.
    14. Soroush Saghafian & Xiuli Chao, 2014. "The impact of operational decisions on the design of salesforce incentives," Naval Research Logistics (NRL), John Wiley & Sons, vol. 61(4), pages 320-340, June.
    15. Doug J. Chung & Thomas Steenburgh & K. Sudhir, 2014. "Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans," Marketing Science, INFORMS, vol. 33(2), pages 165-187, March.
    16. Zhaolin Li & Samuel N. Kirshner, 2021. "Salesforce Compensation and Two‐Sided Ambiguity: Robust Moral Hazard with Moment Information," Production and Operations Management, Production and Operations Management Society, vol. 30(9), pages 2944-2961, September.
    17. Kirkegaard, René, 2023. "Endogenous criteria for success," Journal of Economic Theory, Elsevier, vol. 214(C).
    18. Tinglong Dai & Kinshuk Jerath, 2016. "Technical Note—Impact of Inventory on Quota-Bonus Contracts with Rent Sharing," Operations Research, INFORMS, vol. 64(1), pages 94-98, February.
    19. Osman Alp & Alper Şen, 2021. "Delegation of Stocking Decisions Under Asymmetric Demand Information," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 55-69, 1-2.
    20. Doug J. Chung & Byungyeon Kim & Byoung G. Park, 2021. "The Comprehensive Effects of Sales Force Management: A Dynamic Structural Analysis of Selection, Compensation, and Training," Management Science, INFORMS, vol. 67(11), pages 7046-7074, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:popmgt:v:29:y:2020:i:1:p:62-71. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1937-5956 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.