Abstract
Purpose – Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory. Design/methodology/approach – The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate. Findings – The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high. Research limitations/implications – The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it. Originality/value – This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.
| Original language | English |
|---|---|
| Pages (from-to) | 222-243 |
| Number of pages | 22 |
| Journal | Evidence-based HRM |
| Volume | 3 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2015 Dec 7 |
| Externally published | Yes |
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Keywords
- Employee motivation
- Gaming
- Personnel economics
ASJC Scopus subject areas
- Organizational Behavior and Human Resource Management
Cite this
Incentives and gaming in a nonlinear compensation scheme : Evidence from North American auto dealership transaction data. / Owan, Hideo; Tsuru, Tsuyoshi; Uehara, Katsuhito.
In: Evidence-based HRM, Vol. 3, No. 3, 07.12.2015, p. 222-243.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Incentives and gaming in a nonlinear compensation scheme
T2 - Evidence from North American auto dealership transaction data
AU - Owan, Hideo
AU - Tsuru, Tsuyoshi
AU - Uehara, Katsuhito
PY - 2015/12/7
Y1 - 2015/12/7
N2 - Purpose – Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory. Design/methodology/approach – The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate. Findings – The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high. Research limitations/implications – The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it. Originality/value – This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.
AB - Purpose – Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory. Design/methodology/approach – The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate. Findings – The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high. Research limitations/implications – The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it. Originality/value – This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.
KW - Employee motivation
KW - Gaming
KW - Personnel economics
UR - http://www.scopus.com/inward/record.url?scp=84958770231&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84958770231&partnerID=8YFLogxK
U2 - 10.1108/EBHRM-09-2014-0023
DO - 10.1108/EBHRM-09-2014-0023
M3 - Article
VL - 3
SP - 222
EP - 243
JO - Evidence-based HRM
JF - Evidence-based HRM
SN - 2049-3983
IS - 3
ER -