Group or Individual Sales Incentives? What Is Best for Brand-Managed Retail Sales Operations?

Abstract

This research studies sales force incentive compensation in brand-managed retail (BMR) operations, which are particularly prevalent in high-end department stores and vertically integrated retailers. In particular, the research explores how a brand's strength may affect the relative benefit to a brand from using individual versus group incentives for motivating its salespeople in BMR settings. The authors investigate this issue using a theoretical principal–agent model consisting of a risk-neutral firm employing multiple risk-averse salespeople. Interestingly, they find that a group incentive is more beneficial to a weaker brand than to a stronger one. Furthermore, the authors find empirical support for their theoretical findings from an analysis of sales compensation data from BMR operations in two different settings. The research findings suggest that managers should factor in the brand's strength when deciding on the optimal salesperson compensation structure in BMR settings.