Involving Sales Managers in Sales Force Compensation Design

Area of Science:

• Business Administration
• Management Science
• Economics

Background:

• Sales force incentive design often includes sales managers in compensation plan creation.
• Sales managers possess crucial territory-specific information but may have misaligned incentives.
• Existing methods for incorporating managerial input can be inefficient or prone to bias.

Purpose of the Study:

• To develop a game theoretic model for efficiently leveraging sales managers' territory knowledge in incentive design.
• To determine the conditions under which involving sales managers in incentive design is optimal for the firm.
• To propose a novel "request mechanism" as an alternative to traditional input methods.

Main Methods:

• A game theoretic model was employed to analyze the interaction between a firm and a sales manager.
• The model explores a "request mechanism" where firms delegate decisions within constraints, allowing managers to request relaxed constraints.
• The study compares this mechanism to established theoretical approaches, such as menu contracts for salespeople.

Main Results:

• The proposed "request mechanism" enables firms to efficiently leverage managers' true knowledge.
• Specific conditions are identified under which involving managers in incentive design is optimal.
• The mechanism provides an efficient and reliable alternative to negotiation and lobbying for managerial input.

Conclusions:

• The "request mechanism" effectively incorporates sales managers' territory-level information into incentive design.
• This approach ensures the firm's optimal outcome by setting appropriate constraints and requirements.
• The mechanism demonstrates superior performance over existing theoretical models in certain scenarios.