State-Dependent Sales Force Compensation: The Case of Pharmaceutical Detailing
This research investigates the compensation and incentive strategies of firms that employ a salesperson that does not sell products directly to end-users, but instead, works to influence another agent, the ultimate sales-driving agent, with whom the firm cannot legally contract. We develop a hierarchical game-theoretic model in which sales effort over time influences the state of goodwill perceived by this ultimate independent downstream agent; this goodwill, which can appreciate or depreciate over time, in turn influences the likelihood that the ultimate agent will drive sales. The dynamic evolution of the state of the system (agent goodwill) thus changes the likelihood of sales, and consequently endogenously affects the salesperson's motivation to continue (or not to continue) aggressive selling effort. One example of such a channel is a pharmaceutical firm employing a sales representative to detail physicians, who are the ultimate recommenders of a drug therapy to patients. Our results show that the salesperson's compensation optimally increases with the stock of detailing goodwill when the salesperson is very effective at promoting the drug, and detailing has a high level of endurance. In this case, the more the salesperson details, the more expensive it is for the firm to motivate the salesperson to exert further detailing effort; the optimal pattern of detailing in this situation comprises repetitive cycles of intensive detailing and cursory detailing periods. Conversely, the salesperson's compensation optimally decreases with the stock of detailing goodwill when the salesperson is less effective at training and the physician's perception about the drug is not enduring. In this case, the more the salesperson details, the more affordable it is for the firm to motivate the salesperson to exert further detailing effort. Thus, detailing in this case involves an all-or-nothing decision, where it is optimal either to intensively and continuously detail the physician, or never to conduct intensive detailing.
Fabio Caldieraro, Anne Coughlan
Caldieraro, Fabio, and Anne Coughlan. 2009. State-Dependent Sales Force Compensation: The Case of Pharmaceutical Detailing.