Working Paper | HBS Working Paper Series | 2010

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

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.

Keywords: Compensation and Benefits; Performance Productivity; Mathematical Methods; Salesforce Management; Motivation and Incentives;

Citation:

Chung, Doug J., Thomas J. Steenburgh, and K. Sudhir. "Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans ." Harvard Business School Working Paper, No. 11-041, October 2010.