Side payments in marketing

Hauser, John R.; Simester, Duncan I.; Wernerfelt, Birger
September 1997
Marketing Science;1997, Vol. 16 Issue 3, p246
Academic Journal
Side payments, known politely as gainsharing and pejoratively as bribery, are prevalent in marketing. Indeed, many management schools have added ethics modules to their basic marketing courses to discuss these issues and there is much discussion of side payments in the literature (e.g., Adams 1995, Borrus 1995, Mauro 1997, Mohl 1996, Murphy 1995, Peterson 1996, and Rose-Ackerman 1996). We seek to provide insight with respect to one class of marketing side payments. We hope that our analyses clarify some of the issues and suggest how these side payments affect marketing activities. We begin by focusing on one common example of potential side payments-salesforce ratings of internal sales support. We derive two formal results and speculate on how these results generalize. The two results are (1) that having one group of employees rate another implies that there are almost always incentives for side payments, but (2) the side payments need not reduce the firm's profit. At least in theory, the firm is always able to revise the reward system to factor out these side payments. The first result, based on a straightforward proof, has important practical implications for managers who may wish to preclude side payments. They may be unable to design a ratings-based reward system that does not have inherent incentives for side payments. The second result, in our opinion, is quite surprising. It suggests that marketing managers might be advised to invest more time into understanding how side payments affect employee reactions to reward systems. They might want to reconsider costly efforts to monitor, police, or preclude such side payments. While our results do not substitute for a moral discussion of side payments, we hope that the formal structure for one common marketing situation provides valuable insight. The system we analyze is based on a practical managerial problem we have observed. The salesforce evaluates a sales support group with a real-valued rating. The sales support group is rewarded based on that rating, whereas the sales-force is rewarded based on outcomes, such as sales or customer satisfaction, that indicate incremental profits to the firm. The reward to the salesforce might also depend upon how it rates sales support. For example, the salesforce might be held to a higher standard whenever it rates sales support as "excellent." (We argue in the paper that the firm will want this to happen.) In addition, the salesforce might ask for a side payment from the sales support group as compensation for high ratings. We cast the practical problem as a formal game and incorporate the following issues: (1) incremental actions taken by the salesforce and by sales support are perceived to be onerous, (2) the measure of incremental profit is a noisy measure, (3) both the salesforce and sales support are risk averse, (4) given the reward system imposed by the firm, both the salesforce and sales support will maximize their well-being, and (5) given the structure of the reward system, the firm will seek to maximize expected profits. We first show that there are almost always incentives for side payments. Specifically, we demonstrate that sales support is better off with a side payment, while the salesforce is no worse off. This is not surprising because the reward to sales support is increasing in the rating, while in the absence of a side payment, the salesforce will select a rating such that its net marginal returns to increasing the rating are zero. The exception occurs when the rating is constrained by the firm to be less than this "optimal" rating, but even then there might be incentives for side payments. We next show that the firm can anticipate these side payments and design a reward system to factor them out at no loss of profit. The intuition is straightforward. The firm first adjusts the marginal returns in the reward functions for sales support and for the salesforce such that they will each take the "optimal" actions even though they engage in side payments. Then the firm adjusts their fixed compensation so that the firm extracts its full profit. The proof is difficult because we must show that adjusted reward systems exist and we must show that they allow the full profit to be extracted. Throughout the paper we discuss the practical implications of our results. We close by highlighting future research opportunity.


Related Articles

  • How to Make Dedicated Fleets Work for You. Lehman, Hans; Svindland, Paul // Traffic World;12/17/2007 Supplement, Vol. 271, p20 

    The article offers tips on how shippers in the U.S. can maintain a good relationship with dedicated fleet providers. Shippers are advised to give proper incentives like gain-sharing agreements to dedicated fleet providers to ensure delivery of continuous productivity improvements. Shippers are...

  • Developing and Managing a 20/80 Program. Hise, Richard T.; Kratchman, Stanley H. // Business Horizons;Sep/Oct87, Vol. 30 Issue 5, p66 

    Companies can a receive number of significant benefits from a 20/80 program, including improved profits, greater sales, reduced inventory levels, and more effective deployment of scarce resources. However, these benefits will occur only if companies are willing to develop formal, structured, and...

  • Giving more, getting more from employee bonuses. Cumpata, George // Crain's Chicago Business;12/18/2000, Vol. 23 Issue 52, p11 

    Discusses the approach of gain-sharing in reinvigorating companies' incentive plans and holiday bonuses in the United States. Role of gain-sharing in tying bonuses to specific company targets and distributing them to all employees regularly; Key elements in gain-sharing; Benefits of the...

  • The New Jersey Gainsharing Experience. Coates, Robert G. // Physician Executive;Jan/Feb2014, Vol. 40 Issue 1, p46 

    The article examines the results of a New Jersey gainsharing program how the cost savings used to pay physicians were achieved. It refers to the gainsharing program as a direct payment by hospitals to physicians based on performance. The program was designed to be neutral with Centers for...

  • CHAPTER 9: FINANCIAL INCENTIVES. Miller, Richard K.; Washington, Kelli // Healthcare Business Market Research Handbook;2009, p71 

    Chapter 9 of the book "The 2009 Healthcare Business Market Research Handbook" is presented. It focuses on financial incentives provided to the U.S. healthcare industry. The Bridges to Excellence and the Hospital Quality Incentive Demonstration project are some of the pioneering efforts in the...

  • Allocating a Promotion Budget between Advertising and Sales Contest Prizes: An Integrated Marketing Communications Perspective. Murthy, Pushkar; Mantrala, Murali // Marketing Letters;Jan2005, Vol. 16 Issue 1, p19 

    This paper develops and analyzes a normative model for allocating a fixed, short-term promotion budget between product advertising and prizes of a rank-order sales contest for a homogeneous sales force when sales are driven by both personal selling effort and advertising. The model provides...

  • Marketers cling to commission based payment. Hille, Alfred // Media: Asia's Media & Marketing Newspaper;3/7/2003, p4 

    The traditional billings commission method remains the preferred compensation system in Asia, a study has found. Forty-three per cent of the more than 100 leading marketers polled still used commissions. A similar study in the U.S. in 2000 found that 68 and 35 per cent of companies respectively...

  • New Proposal Compromises Quality of Patient Care. Leahey, Mark B. // Medical Device Technology;Jul2005, Vol. 16 Issue 6, p356 

    Reports on the modification of the ruling by the Office of the Inspector General in the U.S. Publication of six limited advisory opinion that outline specific gain sharing arrangements; Provision of a monetary incentives for the medical doctors in the U.S. to use cheaper medical devices and...

  • Incentives beget collaboration. Burke, Erin // Materials Management in Health Care;Dec2005, Vol. 14 Issue 12, p2 

    The article examines the importance of the concept of gainsharing to provide an incentive to physicians to assist materials managers in reducing expenses on supplies, devices and other materials in hospitals. Even though gainsharing programs are still few in the U.S., the early results are...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics