Author Abstract
We estimate a dynamic structural model of sales force response to a bonus-based compensation plan. The paper has two main methodological innovations: First, we implement empirically the method proposed by Arcidiacono and Miller (2010) to accommodate unobserved latent class heterogeneity with a computationally light two-step estimator. Second, the bonus setting helps estimate discount factors in a dynamic structural model using field data. This is because, quarterly and annual bonuses help generate the instruments necessary to identify both discount factors in a hyperbolic discounting model. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find clear evidence that (1) bonuses enhance productivity, (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas, and (3) sales people exhibit present bias consistent with hyperbolic discounting. Given such present bias, frequent quarterly bonuses tied to high demand end-of-quarter months serve as pacers to keep the sales force on track to achieve their annual sales quotas.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: October 2010
- HBS Working Paper Number: 11-041
- Faculty Unit(s): Marketing