"Optimal Sales Force Diversification and Group Incentive Payments"

Professor Anne Coughlan, Northwestern University, will show in this research that the intereaction between territory allocation and sales compensation, two key drivers of sales productivity, strongly affects the firm's profitiability. She will analyze an agency-theoretical model that jointly considers the degree of nagative or positive correlation across territory outcomes; differences in territories' sales potentials; the agency problem with risk-averse salespeople; and the availability of both own-territory compensation elements, like commission, and elements dependent on the performance of others, like group commissions or tournaments. 

Professor Coughlan finds that allocating salespeople to negatively-correlated sales terrritories beneficially diversifies each salesperson's portfolio of sales outcomes when this allocation includes a group commission pay component, and can improve profitability even with a decrease in average territory sales performance. In a larger sales force, a balanced allocation of salespeople, coupled with a group commission dominates an imbalanced allocation. Comparing piece-rate compensation (with or without a group commission component) to tournaments alongside the allocation problem, we find that tournaments are favored over piece-rate plans when territories are highly positively correlated; territory sales potentials are similar; and salespeople have a low disutility for effort and are not very risk-averse. A piece-rate plan conversely dominates a tournament when these conditions are reversed.