Optimal Sales Force Compensation Plans: An Operational Procedure

This paper describes an operational procedure for identifying optimal sales force compensation plans featuring salary, commissions and/or quota/bonus. Utility-maximising salespeople's behaviours and reactions to given compensation plans are simulated, and the resulting sales, costs and long-term expected profits are assessed. Then, a search technique attempts to identify the long-term profit-maximising compensation plan structure. Operationally, the simulation model parameters are calibrated so as to reflect those of an actual sales force, and consequently the optimal compensation scheme for this specific sales force can be identified. The concept is illustrated in an actual case study.