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To be a risk seeker or a risk avoider: a sale's perspective in response to quotas and rank-order contests

Author: Gaba, Anil ; Kalra, AjayINSEAD Area: Technology and Operations Management Series: Working Paper ; 98/29/TM Publisher: Fontainebleau : INSEAD, 1998.Language: EnglishDescription: 31 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper examines how decisions risk taking on the part of sales managers are influenced by compensation schemes. We show theoretically and with experimental data that such decisions are sensitive to the payoff structure of the quota-based and rank-order-contest-based compensation. More specifically we argue that a high quota or a low porportion of winners in a rank-order contest induce risk seeking, while a low quota or a high proportion of winners in a rank-order contest promote risk aversion. Such behavior does not stem from any violation of standard expected utility, but from jumps in the payoffs. Managerial implications for sponsors of quota-based and contest-based compensation schemes are discussed. The results extend beyond just salesforce management, to many situations where payoffs are based on reaching a certain threshold level in performance or are based on relative performance
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This paper examines how decisions risk taking on the part of sales managers are influenced by compensation schemes. We show theoretically and with experimental data that such decisions are sensitive to the payoff structure of the quota-based and rank-order-contest-based compensation. More specifically we argue that a high quota or a low porportion of winners in a rank-order contest induce risk seeking, while a low quota or a high proportion of winners in a rank-order contest promote risk aversion. Such behavior does not stem from any violation of standard expected utility, but from jumps in the payoffs. Managerial implications for sponsors of quota-based and contest-based compensation schemes are discussed. The results extend beyond just salesforce management, to many situations where payoffs are based on reaching a certain threshold level in performance or are based on relative performance

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