MONITORING AND INCENTIVES IN SALES ORGANIZATIONS - AN AGENCY-THEORETIC PERSPECTIVE

Our primary objective in this paper is to analyze a framework that sim ultaneously examines the role of both monitoring and incentives in the design of sales force control systems. Previous research has focused exclusively on the role of incentives in directing salesforce effort. We build on the structure provided by the past work and analyze an age ncy-thoeretic model in which a salesperson generates wealth for the fi rm by expending effort across two dimensions, namely, internal and ext ernal. We assume that effort in the internal dimension can be monitore d relatively cheaply whereas effort in the external dimension can be m onitored only at infinite cost. We then analyze the following two scen arios: (i) a pure incentives world wherein both effort dimensions are governed through the use of incentive pay, and (ii) a monitoring and i ncentives world wherein the internal dimension is monitored and the ex ternal dimension is governed through the use of incentive pay. In addi tion to modeling the notion of partial monitoring in this manner, we a lso explicitly allow the firm to choose the level of risk aversion des ired in its salesperson. Of course, salespeople who are relatively ris k-tolerant command higher reservation wages; consequently, such salesp eople are likely to be valuable only to those firms that emphasize inc entive pay in their control systems. Our analysis across the two scena rios helps us to demonstrate the implications and value of introducing monitoring into the control structure. Specifically, we find that mon itoring allows the firm to decrease the weight placed on incentives an d hire a relatively risk-averse salesperson from the salesforce labor market. These actions, in turn, permit the firm to reduce the risk pre mium and the reservation wage offered to the salesperson. In direct co ntrast to these monetary savings, however, we find that an adverse sid e effect of monitoring is that it induces salespeople to overemphasize the effort devoted to the monitored dimension while under-emphasizing the effort devoted to the nonmonitored dimension. This adverse effect of monitoring notwithstanding, we find that the overall benefit of in creased monitoring is that it allows the firm to lower the amount of t otal compensation paid to the salesperson. These analytical findings a re consistent with the prescriptions found in the popular business pre ss where it is often stated that compensation plans that emphasize inc entive pay are characterized by independence in managing activities (l ack of monitoring) as well as high income potential. These findings ar e also consistent with the popular wisdom that incentive-laden compens ation plans are generally more appropriate for individuals who are ris k takers and entrepreneurial in nature. We also delineate the conditio ns where monitoring can improve on the profits obtained in a pure ince ntives world. Specifically, we find that monitoring can prove to be mo st valuable when the importance of internal activities is high and the level of incentives is low. Finally, we conclude by conducting a sens itivity analysis to examine the robustness of our results to the speci fications we utilize in our modeling efforts. Overall, we view the mai n contribution of our research efforts as one of explicitly delineatin g the tradeoffs associated with the use of monitoring and incentives i n the design of salesforce control systems. As such, our paper should be of interest to academics and practitioners interested in the design of salesforce control systems.