On optimal salesforce compensation in the presence of production learning effects

James A. Dearden, Gary L. Lilien
1990 International Journal of Research in Marketing  
Ir?.stiture for the Study of Buriness Murket~, The Penn~loonra State lJniuer.sity, tiniuemity Pork, PA 16802, U.S.A. This paper presents a iheory of multi-period salesforce compensation in which a firm experiences a production learning effect. Firm management uses the salesforce compensation plan to promote current period svles (and production) in order to lower future period production costs. The iirm management (principal)-salespcrron (agent) relationship is modeled as an agency relationship.
more » ... The model is a two-period extension of the Basu, Lal, Srinivasan and Staelin (1985) one-period agency model of salesforce compensation. We demonstrate that (relative to the results for the one-period model) firm management should, in the first period, decrease the salary portion of the compensation plan and increase the commission rate (as a percentage of sales). Such changes in the compensation plan motivate the salesperson to iticrzase first period sales effort. The firm is ahle to increase discounted two-perid expected profit by considering production dynamics in this compensation plan. We discuss managerial implications of our model.
doi:10.1016/0167-8116(90)90020-n fatcat:qn6xs452qfdyzbe7rhbpyupaaq