Damping effect of the percentage-based scheme: A novel resilient salesforce compensation to battle market turbulence

This study examines the resilience of two salesforce compensations---the quantity-based (Q-type) and percentage-based (P-type)---under market turbulence. These two compensations are used to incentivize salespeople to promote demand. However, they work in different ways: the Q-type is an absolute compensation under which salespeople's decisions are based on the commission rate and independent of others, whereas the P-type is a relative compensation where a salesperson needs to compete with others to get a higher percentage because compensation is the corresponding proportion of the total compensation.We develop a game-theoretic model involving a firm and salespeople. The firm first announces the compensation and signs up salespeople. Then, salespeople boost demand during the sales season, facing market turbulence.We find some interesting management insights.First, the P-type compensation exerts a damping effect during market turbulence: salespeople under the P-type proactively and rapidly adjust their sales efforts, whereas those under the Q-type do not respond effectively.Second, in the face of market turbulence, the P-type demonstrates greater resilience than the Q-type, which is attributed to its damping effect on salespeople's efforts. Third, while the Q-type is a more reliable choice for firms aiming to open up the market, the P-type is better suited for stabilizing cash flow.Our study introduces an innovative P-type compensation scheme to address market turbulence. This scheme has the potential to transform the industry's approach to compensating salespeople.