Side payments,
known politely as gainsharing and pejoratively as bribery, are
prevalent in marketing. Indeed, many management schools have
added ethics modules to their basic marketing courses to discuss
these issues and there is much discussion of side payments in
the literature (e.g., Adams 1995, Borrus 1995, Mauro 1997, Mohl
1996, Murphy 1995, Peterson 1996, and Rose-Ackerman 1996). We
seek to provide insight with respect to one class of marketing
side payments. We hope that our analyses clarify some of the
issues and suggest how these side payments affect marketing
activities.
We begin
by focusing on one common example of potential side payments
- salesforce ratings of internal sales support. We derive two
formal results and speculate on how these results generalize.
The two results are (1) that having one group of employees rate
another implies that there are almost always incentives for
side payments, but (2) the side payments need not reduce the
firm's profit. At least in theory, the firm is always able to
revise the reward system to factor out these side payments.
The first result, based on a straightforward proof, has important
practical implications for managers who may wish to preclude
side payments. They may be unable to design a ratings-based
reward system that does not have inherent incentives for side
payments. The second result, in our opinion, is quite surprising.
It suggests that marketing managers might be advised to invest
more time into understanding how side payments affect employee
reactions to reward systems. They might want to reconsider costly
efforts to monitor, police, or preclude such side payments.
While our results do not substitute for a moral discussion of
side payments, we hope that the formal structure for one common
marketing situation provides valuable insight.
The system
we analyze is based on a practical managerial problem we have
observed. The salesforce evaluates a sales support group with
a real-valued rating. The sales support group is rewarded based
on that rating, whereas the salesforce is rewarded based on
outcomes, such as sales or customer satisfaction, that indicate
incremental profits to the firm. The reward to the salesforce
might also depend upon how it rates sales support. For example,
the salesforce might be held to a higher standard whenever it
rates sales support as "excellent". (We argue in the paper that
the firm will want this to happen.) In addition, the salesforce
might ask for a side payment from the sales support group as
compensation for high ratings.
We cast
the practical problem as a formal game and incorporate the following
issues: (1) incremental actions taken by the salesforce and
by sales support are perceived to be onerous, (2) the measure
of incremental profit is a noisy measure, (3) both the salesforce
and sales support are risk averse, (4) given the reward system
imposed by the firm, both the salesforce and sales support will
maximize their well-being, and (5) given the structure of the
reward system, the firm will seek to maximize expected profits.
We first
show that there are almost always incentives for side payments.
Specifically, we demonstrate that sales support is better off
with a side payment, while the salesforce is no worse off. This
is not surprising because the reward to sales support is increasing
in the rating, while in the absence of a side payment, the salesforce
will select a rating such that its net marginal returns to increasing
the rating are zero. The exception occurs when the rating is
constrained by the firm to be less than this "optimal" rating,
but even then there might be incentives for side payments.
We next
show that the firm can anticipate these side payments and design
a reward system to factor them out at no loss of profit. The
intuition is straightforward. The firm first adjusts the marginal
returns in the reward functions for sales support and for the
salesforce such that they will each take the "optimal" actions
even though they engage in side payments. Then the firm adjusts
their fixed compensation so that the firm extracts its full
profit. The proof is difficult because we must show that adjusted
reward systems exist and we must show that they allow the full
profit to be extracted.
Throughout
the paper we discuss the practical implications of our results.
We close by highlighting future research opportunities.
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