Allocating sales force effort with commissions and quotas

Quotas, commissions and mixtures of the two are widely used to control salesmen's activities both in terms of overall motivation and as decentralized means to direct allocation of effort over various products in the firm's line. Sales commission plans as allocation devices for a commission-maximizing sales force and a profit-maximizing central management generally turn out to be inadequate decentralized allocation devices in themselves, regardless of whether commissions are based on sales or on profit margins. A plan based on sales fails to reconcile the interests of salesmen and management, while a plan based on profit margins generally makes each salesman's income depend not only on his performance but on the performance of all other members of the sales force simultaneously. Further, information requirements about individual salesmen and markets appear so great that setting optimal quotas centrally is impossible for practical purposes. However, an interative quota generating procedure may be used to reconcile interests of salesmen and management, and yet maintain the desirable features of decentralized allocation consistent with the independent operation of the individual salesman.