Compensation and Peer Effects in Competing Sales Teams

This paper examines how compensation systems impact peer effects and competition in collocated sales teams. We use department store sales data to show that compensation systems influence worker incentives to help and compete with peers within the same firm, which in turn changes the capability of the firm to compete with rivals. Compensation also affects how salespeople impact peers at collocated competing firms, thereby impacting market competition. Moreover, compensation influences how salespeople strategically discount prices in response to peers. Our results suggest that heterogeneity in worker ability enhances firm performance under team-based compensation while hurting individual-based firms and that peer interactions are critical considerations in designing sales force incentive plans and broader firm strategy.

This paper was accepted by Bruno Cassiman, business strategy.