Uniform Commission Contract and Sales Agent Identification

Bao, Y, Shi, M and Waiser, R (2020) Uniform Commission Contract and Sales Agent Identification. Working Paper. London Business School Working Paper.

Abstract

It is commonly observed in many industries that firms often offer the same commission rate to their salespeople, even though these salespeople have different levels of productivity. This observation is puzzling because the standard principleagency model would prescribe that a firm should customize the commission rate according to the salespeople’s productivity (Basu et al, Marketing Science, 1985). This paper provides a theoretical explanation for the offering of uniform commission rate in a heterogeneous salesforce. The model consists of two stages: an probational sales period and a selling stage. In the perfect information case, the firm prefers a positive match (hightype salesperson assigned to the highpotential task) and offers customized commission rates. However, in the case of asymmetric information, while the firm still prefers a positive match, it is now optimal to provide the uniform commission rate. Such a contract is not optimal in perfectinformation case because it gives the hightype salesperson excessive surplus in the second stage. But it becomes optimal in the case of asymmetric information because the excessive surplus becomes information rent and generates additional incentive for the talented salesperson to stand out in the first stage; moreover, the benefit of correct assignment dominates the cost of excessive payment. In summary, we provide a rationale for the commonly observed uniform commission rate as a selection mechanism that improves the sales assignment.