Salesforce Compensation: Theory and Managerial Implications

This paper discusses recent advances in the study of salesforce motivation and compensation. Special emphasis is given to quantitative approaches from the economics, finance, and marketing literatures. The paper summarizes the findings in this analytical work in the context of some examples of compensation practice in order to illustrate the usefulness of the paradigm for the evaluation and setting of compensation systems. We consider some major issues in setting compensation, such as the firm's own objective; the salesperson's objective; and the nature of the sales response function. Variations in these factors imply significant variation in optimal compensation policy, where “optimal” takes into account the components in the plan, the parameter levels of the components, and whether or not a menu of such plans should be made available to the salesforce. By highlighting the results in the literature in light of some relevant compensation examples, we show the applicability of theory to the practical concerns of salesforce management. We close with a summary of these insights and directions for future research in the area.