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

We estimate a dynamic structural model of sales force response to a bonus-based compensation plan. This paper provides substantive insight into how different elements of the compensation plan enhance productivity. We find evidence that (1) bonuses enhance productivity across all segments; (2) overachievement commissions help sustain the high productivity of the best performers, even after attaining quotas; and (3) quarterly bonuses help improve performance of the weak performers by serving as pacers to keep the sales force on track in achieving its annual sales quotas. The paper also introduces two main methodological innovations to the marketing literature: First, we implement empirically the method proposed by Arcidiacono and Miller [Arcidiacono P, Miller RA (2011) Conditional choice probability estimation of dynamic discrete choice models with unobserved heterogeneity. Econometrica 79(6):1823.1867] to accommodate unobserved latent-class heterogeneity using a computationally light two-step estimator. Second, we illustrate how discount factors can be estimated in a dynamic structural model using field data through a combination of (1) an exclusion restriction separating current and future payoff and (2) a finite-horizon model in which there is no forward-looking behavior in the last period.