The impact of risk attitude on the optimal compensation plan in a multi-product situation

This paper examines the role of uncertainty and risk in determining the optimal commission rates a company should choose for each product of a saleman’s product line. The authors assume that sales for each product are a stochastic function of the time (sales effort) allocated to that product. When sales are assumed to be deterministic, they achieve optimality when each product’s commission is the same fraction of its gross margin. However, the authors determine here that when sales are stochastic this may no longer be true. Optimality conditions require explicit consideration of the utility function of the salesman and the moments of the sales response function.