Analysis of a sales force incentive plan for accurate sales forecasting and performance

Firms require accurate sales forecasts to set plans that reflect growth opportunities as well as avoid costs such as those due to stock-outs and excess inventories. Sales forecast accuracy may be improved by using information from salespeople who possess better knowledge than central planners about their territories' sales prospects. However, salespeople may understate sales estimates when their compensation depends on fulfillment of quotas based on their sales forecasts. This paper analyzes an incentive plan introduced by Gonik (1978) that aims to reward a salesperson for self-selecting a demanding forecast as well as its actual fulfillment. We derive the salesperson's response to this plan in a stochastic environment and show how management may adjust the plan parameters to elicit desired sales estimates. The paper concludes with directions for implementation and an assessment of the benefits and limitations of the Gonik scheme.