Sales Force Contracting Under Endogenous Risk∗

for many helpful comments on earlier versions of this paper. The paper has also benefited from comments at the MIT Marketing Seminar and the Marketing Science Conference. Abstract Salespeople choose actions by trading off cost, return and risk. The literature does not consider the impact of risk on action choice. This tradeoff has important implications for the firm. First, the firm may provide no insurance in the salary. Since the agent's action choice will determine her risk, the salary cannot compensate her for it. Second, the firm may not be able to design an incentive scheme to implement particularly risky actions. Finally, a multi-product firm may not be able to design a scheme in which the agent splits her effort across two products that are technological substitutes. One solution is a sales force structured by product. Complements may be more costly to sell through a product structure. Thus, substitutes (complements) should be sold through a product (territory) structure. Scene from " My Little Chickadee " in which a group of men are playing cards: Cousin Zeb: (Walking by, surprised) Uh, is this a game of chance? Cuthbert J. Twillie: Not the way I play it, no.