Business Intelligence

Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis Of Bonus- Based Compensation Plans

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Executive Summary

The author estimates a dynamic structural model of sales force response to a bonus based compensation plan. The paper has two main methodological innovations: First, they implement empirically the method proposed by Arcidiacono and Miller (2010) to accommodate unobserved latent class heterogeneity with a computationally light two-step estimator. Second, the bonus setting helps estimate discount factors in a dynamic structural model using field data. This is because, quarterly and annual bonuses help generate the instruments necessary to identify both discount factors in a hyperbolic discounting model. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity.

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