Optimal Sales Force Diversification and Group Incentive Payments

In this research, we show that the interaction between territory allocation and sales force compensation—two key drivers of sales productivity—strongly affects the firm's profitability. We analyze an agency-theoretic model that jointly considers the degree of negative or positive correlation across territory outcomes, differences in territories' sales potentials, the agency problem with risk-averse salespeople, and the availability of both own-territory compensation elements, such as commission, and elements dependent on the performance of others, such as group commissions or tournaments. We find that allocating salespeople to negatively correlated sales territories beneficially diversifies each salesperson's portfolio of sales outcomes when this allocation includes a group commission pay component, and can improve profitability even with a decrease in average territory sales performance. In a larger sales force, a balanced allocation of salespeople, coupled with a group commission, dominates an imbalanced allocation. Comparing piece-rate compensation (with or without a group commission component) to tournaments alongside the allocation problem, we find that tournaments are favored over piece-rate plans when territories are highly positively correlated, territory sales potentials are similar, and salespeople have a low disutility for effort and are not very risk-averse. A piece-rate plan conversely dominates a tournament when these conditions are reversed.