Sales compensation models - what we can learn from Agency Theory


A. Zehetner - Sales compensation models - what we can learn from Agency Theory - Proceedings Conference Day 2010, Steyr, Österreich, 2010, pp. 11


Many principal-agent-constellations can be found both in the relationship between manufacturers and distributors as well as between management and employed sales people (Kraft 2001). Most products or services are distributed via intermediaries such as sales representatives, sales agents, wholesalers, retailers, franchise partners etc. Following agency theory (or: principal-agent-theory), all those intermediaries can be seen as "agents" of the manufacturer, and the latter is to be considered as the “principal” (Bergen, Dutta and Walker 1992). Two fundamental problems can be found in the constellation between the entrepreneur/CEO/Sales Manager (“principal”) and sales force/field staff (“agents”): The conflict of interests between principal and agent and the risk sharing problem (Tremblay, Côté and Balkin 2003). Antecedents for these problems are information asymmetry between the parties and the stochastic nature of future conditions. As both problems are related to payment and remuneration issues, it is not surprising that compensation of sales representatives is scientific and practical relevance. The aim of this paper is to provide a different perspective on sales compensation through applying agency theory to these issues. The main focus lies on questions of behavioral and outcome orientated sales compensation and the "right" balance between fixed and variable remuneration of sales staff seen through the lens of agency theory. Furthermore, critical issues in methodological and empirical terms and possible directions for future research are discussed.