Optimization models for salesforce compensation

This paper reviews models which address the design of optimal salesforce compensation schemes. The discussion starts with agency theoretic models that are able to derive the optimal form for a compensation scheme under assumptions regarding the degree of information asymmetry and heterogeneity within the salesforce. For the four resulting extreme cases, models are presented that allow for the determination of optimal parameter values for specific compensation schemes such as fixed salary plus commission, bonus for quota achievement, and menus of plans. Finally, there follows an examination of approaches through which commission rates or bonuses can be optimally differentiated, such that the salespersons allocate their selling time in their own – and at the same time in the firm's – best interest. All of these models are reviewed in particular with respect to their applicability in practice.