Incentives and gaming in a nonlinear compensation scheme: Evidence from North American auto dealership transaction data
Abstract
Purpose
Under a discontinuous and nonlinear compensation scheme, which is prevalent among car dealerships, the amount of a salesperson’s expected daily commission depends primarily on his position in the pay schedule on the day he makes a sale. Salespeople thus vary their efforts and adopt a different pricing strategy week by week, or even day by day. The purpose of this paper is to examine the incentive effect of such a nonlinear scheme and provide the evidence that salespeople’s behavior is consistent with the theory.
Design/methodology/approach
The authors conduct regression analyses using the transaction data provided by two North American auto dealerships. The authors construct a daily measure of varying incentive intensity and evaluate its impact on the distribution of individual daily sales and the dealership’s gross profit rate.
Findings
The authors find that the daily measure of varying incentive intensity has a positive effect on the distribution of individual daily sales and a negative impact on the dealership’s gross profit rate. The results suggest that: salespeople adjust their effort levels in response to the intensity of incentives; and they game the system by lowering the prices when the marginal return to doing so is high.
Research limitations/implications
The study shows that there is a high cost associated with the discontinuous nonlinear pay scheme, raising the question of why many auto dealerships use it.
Originality/value
This paper sheds light on the undesirable aspects of discontinuous and nonlinear incentive schemes, varied performance and gaming, by quantifying the effects of the worker’s behavior.
Keywords
Citation
Owan, H., Tsuru, T. and Uehara, K. (2015), "Incentives and gaming in a nonlinear compensation scheme: Evidence from North American auto dealership transaction data", Evidence-based HRM, Vol. 3 No. 3, pp. 222-243. https://doi.org/10.1108/EBHRM-09-2014-0023
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited