Threshold incentives and sales variance

Milind G. Sohoni*, Sunil Chopra, Usha Mohan, Nuri Sendil

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)571-586
Number of pages16
JournalProduction and Operations Management
Volume20
Issue number4
DOIs
StatePublished - Jul 1 2011

Keywords

  • sales variance
  • service and supply chain operations
  • threshold incentives

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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