Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans

We estimate a dynamic structural model of sales force response to a bonus based compensation plan. The paper has two main methodological innovations: First, we implement empirically the method proposed by Arcidiacono and Miller (2011) to accommodate unobserved latent class heterogeneity with a computationally light two-step estimator. Second, we estimate discount factors in a dynamic structural model using field data. The key to identification of discount factors is that bonuses affect only future payoff in non-bonus periods providing exclusion restrictions on current payoffs. Further, we exploit differences in predicted effort (and thus sales) over time from the exponential and hyperbolic discounting models to identify present bias in a hyperbolic discounting model. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find evidence that: (1) bonuses enhance productivity across all segments; (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas; and (3) quarterly bonuses help improve performance of the weak performers by serving as pacers to keep the sales force on track to achieve their annual sales quotas. We also find clear evidence of hyperbolic discounting by salespeople.