Involving Sales Managers in Sales Force Compensation Design

Abstract

Sales force incentive design often involves significant participation by sales managers in designing the compensation plans of salespeople who report to them. Although sales managers hold valuable territory-level information, they may benefit from misrepresenting that information given their own incentives. The author uses a game theoretic model to show (1) how a firm can efficiently leverage a manager’s true knowledge and (2) the conditions under which involving the manager is optimal. Under the proposed approach, the firm delegates sales incentive decisions to the manager within restrictive constraints. She can then request relaxed constraints by fulfilling certain requirements. The author shows how these constraints and requirements can be set to ensure the firm’s best possible outcome given the manager’s information. Thus, this “request mechanism” offers an efficient, reliable alternative to approaches often used in practice to incorporate managerial input, such as internal negotiations and behind-the-scenes lobbying. The author then identifies the conditions under which this mechanism outperforms the well-established theoretical approach of offering the salesperson a menu of contracts to reveal territory-level information.