Time Dependence and Time Preference: Implications for Compensation Structure

This study jointly examines agents’ time dependence—period effects within instantaneous utility—and time preference—the behavior on discounting future utility. It considers the start- and end-of-period effects for time dependence and exponential and hyperbolic discounting for time preference. The study provides formal identification arguments and sufficient conditions for both time constructs, including the duration of time dependence. Using granular individual data and variations in the compensation structure, the empirical analysis separately identifies the two time constructs. Accounting for agents’ time assessment, counterfactual studies examine how changes in compensation structures affect agents’ behavior and, subsequently, their sales outcomes. The findings reveal a trade-off between long- and short-quota cycles, demonstrate the nonlinearity of sales performance relative to the duration of the compensation cycle, and show how quota-bonus plans and commissions can motivate different types of agents.

History: Tat Chan served as the senior editor.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mksc.2022.0037.