Incentives and Ratcheting in a Multiproduct Firm: A Field Experiment

Brahm, F and Poblete, J (2018) Incentives and Ratcheting in a Multiproduct Firm: A Field Experiment. Management Science, 64 (10). pp. 4552-4571. ISSN 0025-1909

Abstract

We develop a model and derive behavioral predictions for a multiproduct sales force subject to goals set based on past performance. We test these predictions using a field experiment in which 53 salespersons from a Chilean beverage company face exogenous variations in monthly sales goals. Confirming our predictions, we found that (1) absent strategic considerations—no goal ratcheting—salespersons increase (decrease) sales in the product category for which the return to effort increases (decreases), (2) including strategic considerations behavior reverses: salespersons who expect high goal ratcheting decrease (increase) sales in the category for which the return to effort increases (decreases), (3) sales did not change for the average salespersons, reflecting heterogeneity in the expectations of goal ratcheting rather than unresponsiveness to incentives. Our study points at the importance of the dynamics of incentive design, in particular, the importance of understanding the dynamics of goal setting in firms.