Working Paper | HBS Working Paper Series | 2013

The Cost of High-Powered Incentives: Employee Gaming in Enterprise Software Sales

by Ian I. Larkin

Abstract

This paper investigates the pricing distortions that arise from the use of a common non-linear incentive scheme at a leading enterprise software vendor. The empirical results demonstrate that salespeople are adept at gaming the timing of deal closure to take advantage of the vendor's accelerating commission scheme. Specifically, salespeople agree to significantly lower pricing in quarters where they have a financial incentive to close a deal, resulting in mispricing that costs the vendor 6-8% of revenue. Robustness checks demonstrate that price discrimination by the vendor does not explain the identified effects.

Citation:

Larkin, Ian I. "The Cost of High-Powered Incentives: Employee Gaming in Enterprise Software Sales." Harvard Business School Working Paper, No. 13–073, February 2013. (Journal of Labor Economics, Forthcoming.)