The Impact of Incentive Compensation on the Salesperson's Work Habits: An Economic Model

Abstract

This paper provides a theoretical framework for assessing the likely impact of variations in the remuneration level on a salesperson's income and sales. It is shown how salespeople who display various behavioral responses to financial incentives should have different sets of values for two observable and measurable elasticities e_i and es (elasticities of income and sales with respect to remuneration). The behavioral responses to financial incentives under consideration are: Salespersons are (1) money sensitive, (2) unresponsive to financial incentives, (3) leisure sensitive, (4) income satisfiers, and (5) “irrational”. The theory can be applied by observing and measuring the two elasticities e_i and e_s, and then inferring salespeople's work habits. The theory is consistent with some empirical data. Practical and normative implications for sales force motivation, compensation plan design, and recruiting are discussed.