Threshold Incentives and Sales Variance

Sohoni, M G and Chopra, S and Mohan, U and Sendil, N (2011) Threshold Incentives and Sales Variance. Production and Operations Management, 20 (4). pp. 571-586. ISSN 1937-5956

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In this paper, we analyze the impact of two forms of commonly used threshold-based incentive schemes on the observed sales variability. The first form of the incentive comprises an additional marginal payment on crossing a specified sales threshold and the second form of the incentive scheme comprises a lumpsum bonus payment on crossing the predetermined sales threshold. We model the effect of such incentives under two specific scenarios: an exclusive dealership selling a single product and a non-exclusive dealer selling two competing products. For an exclusive dealer, we show that a bonus contract not only increases the expected sales, but, more importantly, decreases the sales (order) variance. Consequently, the bonus-based scheme allows the manufacturer to regulate sales variance better. With a non-exclusive dealer, the sales variance increases substantially with an additional marginal payment contract. However, our analysis suggests that the bonus contract continues to perform better in this case, too, if the threshold level is set appropriately using the underlying demand distribution.

Item Type: Article
Subjects: Operations Management
Operations Management > Supply Chain Management
Date Deposited: 19 Oct 2018 13:59
Last Modified: 06 Jul 2023 22:02

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