Studies of compensation schemes for salespersons incorporating sales effort and asymmetric information considerations

Abstract

This thesis contains two largely independent topics, but they both consider the design of compensation schemes for salespersons. Topic 1 is covered in Chapters 1 to 7, and Topic 2 is covered in Chapters 8 to 12. Topic 1. Comparative Study of Salesperson’s Compensation Schemes for a Newsvendor Product, Incorporating Sales Effort and Asymmetric Information Considerations Consider an “owner” engages a “salesperson” to sell a product. The achievable sales depends on the salesperson’s “effort” – a factor that the owner typically cannot measure accurately (the so-called “moral hazard” problem). Therefore, the owner has to design a compensation/incentive scheme that rewards the salesperson on the basis of sales achievements, rather than effort level, even though these achievements also depend on market conditions – a factor for which the salesperson should not be held responsible. On the basis of the classical principal-agent theory, a two-echelon Stackelberg continuous model is built to study the engagement between “owner” and “salesperson” in different trades. In the first echelon the Stackelberg-leader (i.e., the owner) optimizes his or her profit with respect to the compensation scheme parameter values and the order quantity; and in the second echelon, the salesperson optimizes his or her expected income with respect to sales effort. The topic reported herein extends the literature in the following ways. (i) We maximize the owner’s expected profit by optimizing: (a) the parameters for a given compensation scheme; and (b) the newsvendor product one-time order quantity. Four compensation formats are considered for this scenario, and the conditions under which the bestperforming schemes are identified. (ii) We consider the effects of and interaction between a large number of system parameters, including the salesperson’s subsistence income level, the bias levels of the owner’s estimations of the salesperson’s skill level, and the effort cost. Topic 2. Study of Insurance Agent’s Compensation Scheme Incorporating Sales Effort and Biased Information Considerations With respect to the second scenario of selling insurance policies, we investigate the pattern of optimal compensation schemes by considering the insurer profitability and the long-term relationship between insurer and customer in both mature and nascent markets. In order to model this long-term commitment between insurer and agent, the classical principle-agency theory is extended in following ways. (i) We maximize the insurer’s expected long-term profit by optimizing the agent’s compensation scheme over two consecutive years. This two-year optimization horizon enables one to consider properly the reward-tradeoffs between selling new policies and renewing old policies. (ii) We identify the factors that determine the optimal compensation scheme pattern and the insurer’s maximum profit under the assumption that the agent is allowed to resign in the second year. (iii) We examine the influence of accurate level of a given agent’s skill on the insurer’s profitability. Key Words: Compensation scheme; Moral hazard; Asymmetric information; Newsvendor model.