Professional Documents
Culture Documents
Quota-Based Compensation Plans For Multi-Territory Heterogeneous Sales-Forces
Quota-Based Compensation Plans For Multi-Territory Heterogeneous Sales-Forces
REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.com/stable/2582749?seq=1&cid=pdf-
reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms
Operational Research Society and Palgrave Macmillan Journals are collaborating with JSTOR to
digitize, preserve and extend access to The Journal of the Operational Research Society
This paper describes an IBM-PC menu-driven and user-friendly procedure which can help sales
management in setting up optimal quota-bonus plans. For a given sales force, the resulting quota-
bonus plan maximizes the firm's current profits subject to (1) keeping every individual sales-force
member at least at his/her current level of satisfaction (or eventually, increasing this level), and (2) being
consistent and harmonious across sales representatives. The QUOPLAN system is composed of two
submodels. The first submodel is used by salespersons for eliciting their own utility functions, and
is essentially based upon the principles of conjoint analysis. The second submodel is used by manage-
ment for reconciling all the individuals' judgements and the company's objectives into a consistent
quota-bonus plan.
Controlling sales-force activities is a major sales-management task. It is also a difficult task because,
very often, salespeople work away from their home office for long periods of time. Two main
theoretical and empirical research streams have typically been followed to address the sales-force
control problem: setting up (1) decentralized or (2) centralized controls. Decentralized control
research attempts to find conditions under which a salesperson behaving according to his/her best
interest optimizes the firm's objectives at the same time. The jointly optimal sales-force compen-
sation literature has typically followed this route (see, for instance, Berger,1 2 Farley,3 Tapiero and
Farley,4 Weinberg5'6). In order to find such jointly optimal conditions, a set of restrictive
assumptions about salespeople's motives, goals and behaviour is often needed. In addition, this
approach has had some success at devising conditions of sales-force effort allocation, but it has been
less successful at controlling a salesperson's activity level.7'9
This is the reason why a centralized sales-force control approach is often warranted. Centralized
control systems derive guidelines and norms enforced by sales management in order to induce sales
representatives to behave in such a way as to contribute optimally to the firm's own objectives.
The sales-force quota literature typically follows such an approach (see, for instance, Darmon,'0
Davis and Farley,"1 Farley and Weinberg,'2 Winer"3).
The application described in this paper is essentially concerned with the control of salespersons'
activity levels, and hence will follow a centralized approach. The model, QUOPLAN, has been
implemented on the IBM-PC, and can help management design sales-force quota-bonus plans.
These plans will maximize a firm's current profits, subject to keeping all individual salespersons
at their present satisfaction level and to providing an overall consistent and harmonious plan across
salespeople. Salespersons are assumed to have heterogeneous preferences, motives and behaviour.
In addition, short of rationality, no other assumption is needed about individual salespersons'
behaviour.14
This paper is organized as follows: first, the quota setting problem is discussed; second, a formal
model is proposed; finally, the QUOPLAN computer system is described.
PROBLEM-SETTING
Sales quotas are typically used as standards and guidelines to direct salespeople's selling
activities. As a result, they are also convenient control and evaluation devices of salespersons'
performance.5 To be effective, sales quotas must be perceived by salespeople as being attainable
and desirable goals. Otherwise, they are unlikely to raise a salesperson's level of aspiration. Because
meeting quotas is likely to be a desirable objective for a salesperson only if quotas are linked to
some kind of reward/sanction system, quota achievement is generally rewarded, and subquota
performance is sanctioned. Rewards for quota achievement may include financial gains (e.g. a
bonus) or non-financial benefits (e.g. sales-club membership). Sanctions against subquota per-
formers may range from the mere absence of reward to dismissal for recurrent failures to meet
quotas. In this application, a financial bonus is used as a reward, although other forms of financial
or non-financial incentives could have been used as well. The complete absence of bonus is the
sanction for failing to achieve the quota.
Because of the effects of this reward/sanction system on sales-force morale, the importance of
setting 'right' quotas should be underscored. However, setting proper quotas is no easy task, for
at least two reasons.
1. Quotas should be set high enough to bring profits to the company and challenge salespeople.
However, they should be set low enough to be judged attainable and worth the extra effort
by a salesperson. Finding the correct balance is fraught with difficulty. Setting quotas implies
that a sales manager knows the sales response-functions to salespeople's time with some
certainty. Needless to say that this is hardly the case. The response functions depend on such
factors as territory sales-potentials and the responsiveness of the territory to personal selling
activities, as well as on a salesperson's competence level."5
2. Reward for quota achievement should be set high enough to motivate a salesperson to make
the necessary effort to meet quotas, but low enough to keep selling costs under control. Here
again, the balance is not easy to find. The difficulty arises in this case mainly because setting
the proper reward level implies (1) some knowledge about each salesperson's utility functions,
as generally salespeople will find some satisfying compromise between their utility for the
reward and the disutility associated with the effort involved in getting it, and (2) some
knowledge about the attitudes of each salesperson toward risk; for instance, a higher risk must
be borne by a salesperson assigned a high quota and a large reward than by a salesperson
assigned a low quota and a small reward.1"
1122
MODEL DESCRIPTION
In addition to a preliminary step required for inputting necessary application and basic territory
data by a sales manager and/or by individual sales representatives, QUOPLAN is made of two
submodels: a salesperson's and a manager's submodels (see Figure 1).
The salesperson's submodel is designed to interact with every individual salesperson. Its purpose
is to determine every sales representative's profit-maximizing quota-bonus levels, taking into
account his/her preferences for various combinations of quota and bonus levels.
START
Step 1 - QUOPLAN
salesperson i
Ste2 - SALESPERSON i
Step 3 - QUOPLAN
No
/ iN? >
Yes
Step 4 - QUOPLAN
for each salesperson i Oj, B ,f, Oj, BP , 11, AO!, ABj., AJ1
* * B * I0 B0 0, A0,AB,^g.
Is management Yes
satisfied ?
1123
Step 1. Given some basic territory-characteristic data (sales, potential, product-mix margin), the
system determines the meaningful levels of bonus and quotas that will be used in the various
fictitious quota-bonus plans to be used at step 2.
Step 2. Selected subsets of possible combinations of quota and bonus levels are proposed to the
salesperson in charge of the territory. For every selection, the salesperson must indicate which one
is preferred. Depending upon preceding answers, the system selects the next set of quota-bonus
options proposed to the salesperson.
Step 3. The system determines the underlying utilities of the salesperson for the various quota
and bonus levels. Then it specifies the parameters of the utility functions best fitting these data
points. Finally, the system determines the profit-maximizing quota-bonus combination which
leaves this salesperson at his/her present utility level.
The second submodel is essentially an interactive dialogue between the system and the sales
manager. This dialogue should take place only after all individual salespeople have indicated their
preferences to the system through the preceding submodel. The second submodel includes two
additional steps:
Step 4. Taking into account all the individual optimal solutions at the end of step 3, the system
determines an overall consistent plan across salespeople. To do so, all the individual quota-bonus
solutions must be related by a logical monotonic function (to be selected by management). The
parameters of this function are selected so as minimally to move each salesperson's optimal
compromise along his/her indifference curve (so as to keep the same utility level). The output of
step 4 provides a comparison between the optimal solution and the collectively consistent solution,
for each salesperson and for the whole sales force. Thus, the cost of a specific consistency function
can be assessed (and eventually changed).
Step 5. After a sales manager has examined the solution, he may accept or reject it. The
solution may be changed by assigning unequal weights to the various sales representatives. These
weights may reflect the level of confidence the manager has that various salespeople will
actually achieve their optimal quota, or reflect other subjective judgements about each
salesperson/territory. A new quota-bonus plan will be computed with the new set of weights. Thus,
steps 4 and 5 can be repeated an infinite number of times until management is satisfied with the
final solution.
Setting the range and levels of the quota and bonus options (step 1). Because sales potentials and
sales penetrations may widely vary among territories, and are known to be determinants of sales,15
quota comparisons among territories are expressed as proportions of untapped potential. Thus,
the minimum yearly quota to be given to a salesperson i is defined (for instance) as his/her present
yearly sales level Si. The maximum yearly quota Qi is defined as:
where:
Five equidistant levels are selected within the quota range, i.e. q1 = 0, q12 = i/4, qi3 =qi
q4= qi/4 and qi5 = h
In the same way, a maximum conceivable bonus for a very high performer is selected by a
manager to be B. Four equidistant bonus levels are selected as: B11 = 0, B12 = B /3, Bi3 = 2B
1124
U(Qi,j+ 1, Bik) < U(Qij, Bik) with 1 sj < 4 and 1 < k < 4 (3)
In other words, it is assumed that sales representatives' utilities are monotonically increasing as
the bonus size increases and monotonically decreasing as the quota levels increase. In addition,
past experience has shown that salespersons' utilities for quotas decrease at an increasing rate as
quotas are increased.10 This reflects the fact that each additional quota increase requires increasing
marginal efforts from salespeople. Mathematically, this is expressed by:
If
with
1125
Now continuous curves are fitted to these data points. This procedure has been shown to be more
accurate than piecewise interpolations.21 Past experience with this procedures has shown that the
bonus utilities can be adequately represented by a positive linear function of the bonus levels, and
the quota utilities by a decreasing quadratic function of quota levels. In other words, the following
functional forms are used by the model:
and
The coefficients ai, bi, ci, di and ei are computed through linea
the least-squares method. Currently, the sales representative i has a utility level of ai + ci (i.e. no
additional quota, no bonus). If quota is increased to a certain value qi, quota utility will drop from
ci to ui = ci + diqi + eiq, i.e. this utility will decrease by - (di qi +eiq). In order to keep this
salesperson at his/her original utility level (ai + ci), this drop must be compensated by a certain
bonus Bi:
Equation (8) represents a salesperson's iso-preference curve. In other words, this salesperson
should display the same preference level for all the points (or quota-bonus combinations) on this
curve.
The next step is to find the additional quota proportion q* and the bonus B* that will
maximize profits subject to the constraint that the new plan remains on the sales represen-
tative's iso-preference curve. The additional profits Ani generated by the additional quota are
given by:
Consequently, the optimal additional quota that will maximize additional profits is characterized
by the proportion q* of untapped potential:
or
and
Finding a consistent quota-bonus plan (step 4). Although once all the sales representatives
have interacted with the system, an optimal quota-bonus plan has been determined for each of
1126
them, there is no guarantee that the different solutions will follow a consistent pattern. In
most cases, management would like to have a logical and consistent pattern between additional
quotas and bonuses. This principle will be illustrated here with a simple linear relationship,
although any monotonically increasing pattern may be used. In QUOPLAN, a sales manager
has the option to select any functional form of the type: Bi = Cqx( > 0), and a specific
value for a. If 0 < a < 1, the function displays decreasing marginal returns; if a > 1, it displays
increasing marginal returns; if a = 1, the function is linear. For instance, management may
wish to see that all the quota-bonuses (qi, Bi) given to the salespersons follow the linear
relationship:
where C is a constant. Because generally (Q?, B?) will be different from (Q*, Br), management
will change the optimal plan but will want to keep the salesperson at the same utility level.
Consequently,
Consequently, selecting the consistent plan (Q ?, B?) instead of the optimal plan (Q *, B*) results
in a drop of additional profits of equation (10) less equation (18), or:
dAiti = [(Pi- Si)mi-f ]qi -giqi2 mi(Pi- S)(C -f)/gi + C(C -f)/ggi (19)
The weights can be changed any number of times until the sales manager is satisfied with the
proposed plan.
1127
The typical salesperson dialogue with QUOPLAN is given in Appendix 1, and is essentially
self-explanatory.
CONCLUSIONS
The basic theoretical principles and the conjoint analysis procedure to elicit salespeople's
judgements have already been tested and have proved to be quite valuable (see Darmon10).
However, because the procedure was not easy to implement at the sales-force level, the procedure
could not be used as a routine management tool. This paper has presented a completely
menu-driven computerized procedure which is extremely user-friendly and which should remove
most of the obstacles to using these concepts for the practice of sales-force controls. More
specifically, through QUOPLAN, each salesperson can now provide his/her preferences for various
quota and bonus options through a simple and short dialogue with the system. Then QUOPLAN
can provide the sales manager with a quota-bonus plan which is consistent across salespeople. In
addition, QUOPLAN can take into account a manager's judgemental inputs. This ensures that the
sales manager keeps in control of the system, and will eventually reach a solution that is acceptable
to management.
1128
APPENDIX 1
SCREEN 1
[If the salesperson types: '2', SCREEN 2 appears. If '1' is typed, SCREEN 4
appears.]
SCREEN 2
Assume that you are given the choice between these two plans.
Which one would you prefer? (from 1 to 2):
1129
SCREEN 3
Assume that you are given the choice between these three plans.
Which one would you prefer? (from 1 to 3):
[This process continues between 10 and 15 times. Then, the salesperson is thanked
for his/her co-operation.]
SCREEN 4
HISTORICAL DATA
You have interacted with QUOPLAN and your preferences will be taken
into account.
1130
APPENDIX 2
SCREEN 1
DIALOGUE
1 JOHNSON ** 17 WEBSTER
2 SMITH ** 18 CLAIRBORNE
3 BROWN ** 19 WILLIAM
4 JAMISON 20 McKINLEY
5 SIMON : 21 KENNEDY
6 WATT : 22 LEWIS
7 NICHOLSON 23 GARFIELD
8 COOLIDGE : 23 CARSON
9 SCOFIELD : 25 WHITE
10 PUNBAR : 26 LUKE
11 SANDERS : 27 ROTCHEL
12 JACKSON : 28 DARMON
13 BOWEN : 29 BYRNE
14 PARKER : 30 SCOWCROFT
15 CONALLY : 31 MAILER
16 LONG : 32 CLARK
[After all territories have been listed, QUOPLAN will print out the quota-bonus
plan it has just worked out, starting with a list of totals, as shown below.]
SCREEN 2
QUOTA-BONUS PLAN
* * * * * TOTALS * * * * *
1131
SCREEN 3
QUOTA-BONUS PLAN
Now, you may enter a new weight a (0 < a < 1), or a territory number,
('N' for next territory, 'P' for preceding, '0' to compute new plan, space bar
for totals). Press the Esc key to exit.
[This process continues until the manager is satisfied with the quota-bonus plan.]
REFERENCES
1. P. D. BERGER (1972) On setting optimal sales commissions. Opi Res. Q. 23, 213-215.
2. P. D. BERGER (1975) Optimal compensation plans: the effects of uncertainty and attitude towards risk on the salesman
effort allocation decision. In Proceedings of the 1975 Marketing Educators' Conference (E. MAZZE, Ed.). American
Marketing Association, Chicago, Ill.
3. J. U. FARLEY (1964) Optimal plan for salesmen's compensation. J. marking Res. 1, 39-43.
4. C. S. TAPIERO and J. U. FARLEY (1975) Optimal control of sales force effort in time. Mgmt Sci. 21, 976-985.
5. C. B. WEINBERG (1975) An optimal commission plan for salesmen's control over prices. Mgmt Sci. 21, 937-943.
6. C. B. WEINBERG (1978) Jointly optimal sales force commissions for non-income maximizing sales forces. Mgmt Sci.
24, 1252-1258.
7. R. Y. DARMON (1981) Optimal compensation plans for salesmen who trade-off leisure time against income. J. Opl Res.
Soc. 32, 381-390.
8. R. Y. DARMON (1983) A partial theory of sales force response to compensation changes. In Proceedings of the 12th
Annual Conference of the European Marketing Academy, Grenoble, France.
9. V. SRINIVASAN (1981) An investigation of the equal commission rate policy for a multi-product sales force. Mgmt Sci.
27, 731-756.
10. R. Y. DARMON (1979) Setting sales quotas with conjoint analysis. J. marking Res. 15, 133-140.
11. 0. A. DAVIS and J. U. FARLEY (1971) Allocating sales force effort with commissions and quotas. Mgmt Sci. 18, 55-63.
12. J. U. FARLEY and C. B. WEINBERG (1975) Inferential optimization: an algorithm for determining optimal sales
commissions in multi-product sales forces. Opi Res. Q. 25, 413-418.
13. L. WINER (1973) The effect of product sales quotas on sales force productivity. J. marking Res. 10, 180-183.
14. R. Y. DARMON (1974) Salesmen's response to financial incentives: an empirical study. J. marking Res. 11, 418-426.
15. H. C. LUCAS, C. B. WEINBERG and K. CLOWES (1975) Sales response as a function of territory potential and sales
representative workload. J. marking Res. 12, 298-305.
16. P. E. GREEN and V. SRINIVASAN (1978) Conjoint analysis in consumer research: issues and outlook. J. Cons. Res. 5,
103-123.
17. J. B. KRUSKAL and F. CARMONE (undated) Use and theory of MONANOVA, a program to analyze factorial
experiments by estimating monotone transformations of the data. Unpublished paper.
18. R. M. JOHNSON (1975) A simple method for pairwise monotone regression. Psychometrika 40, 163-168.
19. P. E. GREEN (1975) Marketing applications of MDS: assessment and outlook. J. Marktng 39, 24-31.
20. J. R. HAUSER and G. L. URBAN (1977) A normative methodology for modeling consumer response to innovation. Opns
Res. 25, 579-619.
21. D. PEKELMAN and S. K. SEN (1977) Measurement and estimation of conjoint utility functions. J. Cons. Res. 5,
263-271.
1132