Post date: Jul 14, 2017 11:31:29 AM
Hemant K. Bhargava and Olivier Rubel, “Sales Force Compensation Design for Two-Sided Market Platforms”, Journal of Marketing Research (forthcoming) (2019).
Two-sided market platforms, like all businesses, require active selling to bring participants into the platform's network. Compensation plans for selling agents are usually designed to account for moral hazard due to unobservability of effort and uncertain outcomes, and also to optimally balance risk and reward due to uncertainty. For platforms, the economics forces underlying salesforce compensation design are fundamentally altered because of the role of direct and indirect network effects in adoption decision of participants. How exactly does the agency relationship between the platform and its sales agent change, and how should managers redesign compensation plans in light of that? Should performance based incentives increase or decrease as network effects vary? Which metrics should be used to incentivize agents and what are the implications for profit? This paper investigates these strategic managerial questions via an agency model of platform sales, and we provide guidance regarding compensation plan design for various types of platforms. We find that the agent and the firm respond differently to network effects: they always increase the agent’s effort, but can have either a positive impact, a negative impact or no impact on sales commissions depending on the structure of the compensation plan. Moreover, we discover that under the standard one-dimensional compensation structures, network effects can erode profit when the compensation plan is optimally configured with respect to network effects. Why? Because network effects create externalities that cannot be fully internalized by traditional plans. Firms should instead use novel multi-dimensional plans to incentivize agents to fully internalized all network externalities and ultimately restore the beneficial impacts of network effects on profits.