Sales contests versus quotas with imbalanced territories
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Sales contests versus quotas with imbalanced territories Niladri B. Syam & James D. Hess & Ying Yang
Published online: 13 October 2012 # Springer Science+Business Media New York 2012
Abstract This paper studies the consequences of sales contests versus quota systems when territories have imbalanced sales potential. How do the optimal sales, efforts of salespeople, and profits vary with territory imbalance in a sales contest and how do these change if compensation is based upon quotas? Our major result is that territory imbalance has a differential effect: it hurts a contest more than a quota. In a sales contest, the salesperson in the stronger territory only need to mimic the effort of the salesperson in the other territory to maximize compensation, but this implies that the salesperson in the weaker territory will shirk relative to a quota system. Handicapping the contest to correct for territory imbalance overcomes its disadvantage vis-à-vis the quota plan, but this is seldom incorporated into sales contests. Keywords Imbalanced sales territories . Sales contest . Quotas . Sales potential
1 Introduction Firms frequently use sales contests and quotas to motivate salespeople, especially with an eye to accelerating short-term results (Murphy and Dacin 1998; Murphy et al. 2004; Oyer 2000; Darmon 1979). A sales contest pits one salesperson against others while a quota prespecifies a sales goal required to earn a bonus. N. B. Syam (*) : J. D. Hess : Y. Yang Department of Marketing and Entrepreneurship, University of Houston, Houston, TX 77204, USA e-mail: [email protected] J. D. Hess e-mail: [email protected] Y. Yang e-mail: [email protected]
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Mark Lett (2013) 24:229–244
A major consideration in designing any compensation system, including sales contests and quotas, is the sales potential of the different territories assigned to the salespeople. The number and quality of the customers in a territory has a huge impact on sales, and such sales potential is one of the three major factors in territory planning (Talley 1961). In their influential book on sales force compensation, Zoltners et al. (2006) say that the measurement of territory potential is one of the five critical steps in setting sales force goals. There have been some attempts at incorporating territory potential in sales response functions (Lucas et al. 1975), but the problem of properly accounting for territory potential in designing compensation persists. Though managers try as best they can to balance the territories, as a practical matter this is not always feasible and maybe too costly. Many practitioners have commented on how unequal sales territories are in actual practice. Quite recently, Zoltners and Lorimer (2000, p.139) have remarked that, “We have observed that sales managers are frequently surprised to learn how unequal their sales territories are.” Cravens et al. (1972) have noted that balancing territories is a persisting problem (p. 31). Moreover, the problem of aligning territories is likely to endure even when potentials are known to be differe
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