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Desmond Lo: The Incentive and Selection Roles of Salesforce Compensation Contracts: Journal of Marketing Research
Monday, Jan. 10, 2011
Taking conventional wisdom about agency theory head- on, Assistant Professor of Marketing Desmond Lo and his colleagues are about to publish an empirical paper that challenges long- held beliefs about sales incentives in a top marketing journal.
Classical agency theory predicts that under higher technological uncertainty and/or industry demand fluctuations, companies offer lower incentive rates- in the form of variable pay that includes bonuses, commissions, or rewards tied to quotas- to their employees. However, data has not supported this prediction, and Lo and his colleagues wanted to solve this puzzle and provide a solution.
Using industrial sales force data in their essay, “The Incentive and Selection Roles of Salesforce Compensation Contracts”, Lo and his colleagues attribute the discrepancy between the theory and the data to agency theory’s focus on the incentive provision that is given to existing employees, and its omission of the selection effect for both current salespeople and potential job candidates that focuses on how firms use incentives to attract and retain their desired type of employees. A key result from their data analysis is that more capable and less risk-averse sales people self-select to, and remain in, firms that offer higher incentive rates. Incentive rates in turn are determined by factors such as customer heterogeneity and firm reputation but not exogenous technological or demand uncertainties.
As such, Lo’s research can benefit reputable high tech firms that are more likely to deal with heterogeneous business needs from their customers by demonstrating that they can use a high incentive rate to attract more capable salespeople and to deter the more risk- averse salespeople from joining the company. In doing so, companies save risk premium paid in employees’ compensation packages; at the same time, the higher incentives motivate the desired type of salespeople to increase sales. In this way, higher company profitability would ensue.
After four years of hard work, Lo and his colleagues are being rewarded with the publication of their essay in the Journal of Marketing Research, a top marketing journal which has published a stream of work in agency models and related salesforce contracts issues over 20 years.