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Optimal Sales Force Diversification and Group Incentive Payments, Marketing Science

Abstract

This research investigates sales force diversification and the associated compensation and incentive strategies of firms that have the opportunity to deploy their sales forces to territories of different characteristics. Building on insights on financial portfolio diversification, combined with an agency theory perspective on sales force incentives and motivation, we show that allocating all salespeople to the same type of territory is not necessarily profit-maximizing, even if such a territory type has the highest expected sales productivity. Further, diversifying the sales force by allocating salespeople to territories of different types is insufficient to coordinate the sales channel. However, diversification along with the offer of a group incentive component in the pay plan can improve profitability over the homogeneous-territory allocation strategy, even when it involves allocating some salespeople to less productive territories. The logic is that the group incentive effectively diversifies the reward the salesperson accrues in return for effort in his own territory, and thus reduces the risk inherent in exerting high effort levels in a territory subject to variance in outcomes; it thereby decreases a risk-averse salesperson's optimal compensation and may increase optimal effort levels, which in turn increases the firm's sales and profits. Interestingly from a methodological point of view, the portfolio diversification insight from the Finance literature is helpful, but not sufficient, to explain our approach to the problem. This is because in the diversification of a financial portfolio, the productivity (i.e., returns) of individual stocks does not change because of their inclusion in the portfolio. In contrast, the sales force context must explicitly take account of the agency issues involved in changing the compensation plan. Specifically, the salesperson's optimal effort level can be expected to change as a result of the compensation-plan portfolio offered to him, which in turn affects sales and profitability; such outcome changes do not plague the standard Finance portfolio-optimization problem.

Type

Article

Author(s)

Fabio Caldieraro, Anne Coughlan

Date Published

2009

Citations

Caldieraro, Fabio, and Anne Coughlan. 2009. Optimal Sales Force Diversification and Group Incentive Payments. Marketing Science. 28(6): 1009-1026.

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