Threshold incentives and the sales hockey stick

In this paper we study threshold-based sales-force incentives and their impact on a dealer’s optimal effort. A phenomenon, observed in practice, is that the dealer exerts a large effort towards the end of the incentive period to boost sales and reach the threshold to make additional profits. In the literature, the resulting last period sales spike, is sometimes called the hockey stick phenomenon (HSP.) We show that lack of information leads to the HSP and characterize its form over multiple time periods. Under perfect information it is possible to completely eliminate the HSP, however, this may be difficult in practice. We show that the manufacturer can control the HSP by using imperfect information to set the threshold and delay its computation until the last period. We discuss an implementation plan that allows the manufacturer to do so. We then study the impact of competition on the HSP and show conditions under which the HSP can be dampened or exacerbated. We also characterize the variance of the total sales across all the periods and demonstrate conditions under which offering a bonus contract may be beneficial in controlling the variance.