Do bonuses enhance sales productivity?
Subtitle: a dynamic structural analysis of bonus-based compensation plans
By: Doug J. Chung, Thomas Steenburgh, K. Sudhir
Contributors: Steenburgh, Thomas J.; Sudhir, K.; Harvard Business School
Series: Working paper / Harvard Business School -- 11-041; Working paper (Harvard Business School) -- 11-041.
Publisher: Harvard Business School
Published: 2010
Place of publication: [Boston]
Language: eng
Number of pages: 48
Description: 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.
Notes: "October 2010"--Publisher's website.

Includes bibliographical references.