The impact of operational decisions on the design of salesforce incentives

Soroush Saghafian, Xiuli Chao

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

When facing high levels of overstock inventories, firms often push their salesforce to work harder than usual to attract more demand, and one way to achieve that is to offer attractive incentives. However, most research on the optimal design of salesforce incentives ignores this dependency and assumes that operational decisions of production/inventory management are separable from design of salesforce incentives. We investigate this dependency in the problem of joint salesforce incentive design and inventory/production control. We develop a dynamic Principal-Agent model with both Moral Hazard and Adverse Selection in which the principal is strategic and risk-neutral but the agent is myopic and risk-averse. We find the optimal joint incentive design and inventory control strategy, and demonstrate the impact of operational decisions on the design of a compensation package. The optimal strategy is characterized by a menu of inventory-dependent salesforce compensation contracts. We show that the optimal compensation package depends highly on the operational decisions; when inventory levels are high, (a) the firm offers a more attractive contract and (b) the contract is effective in inducing the salesforce to work harder than usual. In contrast, when inventory levels are low, the firm can offer a less attractive compensation package, but still expect the salesforce to work hard enough. In addition, we show that although the inventory/production management and the design of salesforce compensation package are highly correlated, information acquisition through contract design allows the firm to implement traditional inventory control policies: a market-based state-dependent policy (with a constant base-stock level when the inventory is low) that makes use of the extracted market condition from the agent is optimal. This work appears to be the first article on operations that addresses the important interplay between inventory/production control and salesforce compensation decisions in a dynamic setting. Our findings shed light on the effective integration of these two significant aspects for the successful operation of a firm.

Original languageEnglish (US)
Pages (from-to)320-340
Number of pages21
JournalNaval Research Logistics
Volume61
Issue number4
DOIs
StatePublished - 2014

Fingerprint

Incentives
Inventory Control
Production Management
Production Control
Inventory Management
Inventory control
Production control
Adverse Selection
Moral Hazard
Dependent
Control Policy
Optimal Strategy
Design
Compensation and Redress
Salesforce
Control Strategy
Hazards
Business
Compensation packages
Demonstrate

Keywords

  • adverse selection
  • dynamic incentive design
  • inventory control
  • moral hazard
  • principal agent

ASJC Scopus subject areas

  • Ocean Engineering
  • Modeling and Simulation
  • Management Science and Operations Research

Cite this

The impact of operational decisions on the design of salesforce incentives. / Saghafian, Soroush; Chao, Xiuli.

In: Naval Research Logistics, Vol. 61, No. 4, 2014, p. 320-340.

Research output: Contribution to journalArticle

Saghafian, Soroush ; Chao, Xiuli. / The impact of operational decisions on the design of salesforce incentives. In: Naval Research Logistics. 2014 ; Vol. 61, No. 4. pp. 320-340.
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