Setting Commission Rates for the Control of the Salesperson's Client-prospect Effort Allocation

The literature on setting optimal commission rates for decentralized controls over salespeople's time allocations has used the sales of various product lines as the relevant selling activities. When the time allocation is between calls to prospects versus customers, the problem should account for specific aspects, such as: (1) the conversion pattern of prospects for the various product lines; (2) the attrition rate in the sales force; (3) the salespeople's attitudes toward delayed income. These variables recognize that several calls over some period of time are typically needed for converting prospects, and that salespeople will be able to cash commissions only at the conversion time and provided they are still in charge of the same accounts. Using a simple Markovian structure, this paper shows that under typical conditions, commissions on sales to prospects during the conversion period should always be larger than commissions on sales to customers. Managerial implications and implementation issues are discussed.