Executive Summary
Two fundamental issues pertaining to sales force pay puzzle many decision makers: its level and its structure (i.e., how much is paid out and the ratio between fixed and variable pay). Studying the paychecks drawn by people in more than 14,000 selling jobs and more than 4000 sales management jobs in five business-to-business industry sectors across five European countries, the authors find that firms focus much attention on managing the net pay salespeople receive because employees are motivated by their financial compensation.
Without a suitably strong incentive for performance, sales personnel in highly taxed countries might wonder if the paycheck is worth their effort because their after-tax income differentials may be so compressed that employees wonder why they should work harder. The results in this study suggest that managers use “the voice of the market,” by weighting variable pay more heavily in the total pay package, to meet this challenge. In other words, firms combat this loss of motivation by pushing down salary and/or increasing variable pay. By basing more of a salesperson’s remuneration on sales results, the firm can reduce the high cost of taxes paid for low performers. This practice widens the pay gap—which is artificially reduced through taxes—between low and high sales performers. However, variable pay is not a panacea. Even for the sales profession, performance becomes difficult to observe as job challenge increases. The authors show that firms rely proportionately more on salary for sales professionals with greater job-related challenges.
An issue potentially more fundamental than how to compensate salespeople is how to compensate sales managers. Across the board, the message seems to be clear: As managerial performance is multiplied through salespeople’s performance, the sales manager’s role becomes increasingly critical to the success of the firm. More bluntly, a bad salesperson may lose a few of his or her sales, but a bad sales manager may negatively affect dozens or hundreds of salespeople. The results show that sales managers, similar to chief executive officers, can have an important multiplier effect, which justifies paying them at increasing rates as job challenges rise. That is, because they have more challenging jobs, they should be rewarded with higher salaries.
Taken together, these findings suggest that a first-best (unconstrained) compensation plan may not be feasible. However, sales compensation is optimally affected by the constraints in the market.
Biography
Dominique Rouziès (PhD, McGill University) is Professor of Marketing at HEC-Paris. Her marketing expertise and interests focus primarily on strategic sales force management in international settings. The primary focus of her work is on sales force compensation. Related topics of interest deal with sales force control systems and the marketing–sales interface. She has published in International Journal of Human Resource Management, International Journal of Research in Marketing, Journal of Personal Selling & Sales Management, Journal of the Operational Research Society, and Journal of the Academy of Marketing Science, among others, as well as in the French and international business press (e.g., The Financial Times).
Anne T. Coughlan is Professor of Marketing in the Kellogg School of Management at Northwestern University and has been on the faculty there since 1985. Her research focuses on issues of sales force management and compensation; distribution channel design, incentives, and coordination; and pricing. She is an area editor at Marketing Science and serves or has served on the editorial boards of many major marketing journals. She is the lead author of Marketing Channels (7th ed.), the leading textbook on channel design and management. She has published in Journal of Marketing, Marketing Science, Management Science, Journal of Retailing, Quantitative Marketing and Economics, International Journal of Research in Marketing, Manufacturing & Services Operations Management, Journal of Business, Journal of Accounting and Economics, and Managerial and Decision Economics.
Erin Anderson (deceased) (PhD, University of California, Los Angeles) was John H. Loudon Chaired Professor of International Management and Professor of Marketing at INSEAD since 1994. Before that, she was Professor of Marketing in the Wharton School at the University of Pennsylvania. Her research, which focused on sales forces and channels of distribution motivation, structure, and control, won the Louis Stern Award from Journal of Marketing Research, the Decade Award from Journal of International Business Studies, and the American Marketing Association Interorganizational Special Interest Group Lifetime Achievement Award in 2008, among other prestigious awards. She wrote two books and more than 40 scholarly articles in the fields of marketing and management.
Dawn Iacobucci is E. Bronson Ingram Professor of Marketing in the Owen Graduate School of Management at Vanderbilt University. Previously, she was Professor of Marketing in the Kellogg School of Management at Northwestern University (1987–2004), University of Arizona (2001–2002), and the Wharton School at the University of Pennsylvania (2004–2007). She is former editor of both Journal of Consumer Research and Journal of Consumer Psychology. She is author of Mediation Analysis and coauthor on Gilbert Churchill’s lead text on Marketing Research.
Journal of Marketing, Volume 73, Number 6, November 2009
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