Unfairness in Sales Teams: A Behavioral Exploration

Unfairness in sales force compensation is a very challenging problem in global sales organizations. Sales executives find a growing number of complaints of unfair compensation from field salespeople. While some salespeople think it is alright to get same compensation plan as someone less competent, others might think it is totally unfair to them. When salespeople perceive they are not compensated fairly, they become less motivated, get slack, destroy morale, kill teamwork, or even worse, quit. How do feelings of unfairness about the compensation system affect salespeople’s decisions and firm’s profit? I endeavor to solve this challenging managerial problem of unfairness in the team-based compensation. I first built up a principle-agent model for a sales team of two salespeople, who have different roles and responsibilities and different preferences for inequity. I then use laboratory experiments to test the theory predictions and estimate inequity aversion of salespeople in a sales team.

In particular, Essay 1 builds an analytical model of sales team to tackle the managerial problem of motivating team-selling salespeople effectively when team-based rewards engender a sense of unfairness. By introducing inequity aversion into standard principal-agent analytic models of sales team, I have obtained the equilibrium effort decisions for both the manager and the salesperson in a sales team. When the sales manager has to do both selling and coaching and the salesperson only has to sell, their effort decisions depend on not only their own commission rates but also their team member’s. In addition, their inequity aversion with respect to commission rate difference will reduce their effort levels and firm’s profit. If the firm realizes the inequity aversion of these salespeople, equal commission rates will be offered to mitigate the impacts of inequity aversion. Surprisingly, I found that, in some circumstance, the more inequity averse the sales manager is, the more help is he willing to give to the salesperson who is earning higher commission rate than him. However, this surprising result vanishes with homogeneous commission rates.

Essay 2 tests whether the manager and the salesperson conforms to the theory in their effort decisions in a laboratory experiment. I conducted 2x2 between-subject experiments with two levels of commission rates and salaries for the manager while those of the salesperson are held as constant. By manipulating inequity, I am able to empirically estimate both disadvantageous inequity aversion, envy, by the manager and advantageous inequity aversion, guilt, by the salesperson. I have found the manager has envy for commission rate but not so much for the salary. In comparison, the salesperson does not feel guilty regarding to their higher commission rates and/or higher salaries. Although they do not share a common belief in each other’s inequity aversion, their decisions of efforts and switching to another pay reflects their preferences to other person’s commission rate but not salary.