Bonuses versus Commissions: A Field Study

Abstract

Quota-based bonuses and commissions are the two most common incentive compensation plans. The authors uncover differential effects of these plans from a natural field-based experiment featuring 14,000 monthly observations over three years from 458 sales territories of a pharmaceutical firm that switched from a bonus plan to an equivalent commission plan. The intervention led to significant sales productivity improvement; this effect was heterogeneous across ability deciles, with much larger increases occurring at lower ability deciles. The authors find significant differences across these plans on (1) effort against nonincentivized tasks and (2) output fluctuations induced through “timing games.” At this firm, the bonus plan was strictly inferior to the implemented commission plan with respect to short-term revenues and timing games. In contrast, the commission plan induced greater neglect of nonincentivized tasks (tasks not directly affecting observable output). To organize their findings, the authors build a simple theoretical model in the personnel economics tradition. The novel result that multitasking concerns are reduced under bonus plans when the quota has been met provides a nuanced rationale for the widespread existence of lump-sum bonus plans.