Optimal Salesforce Sizing and Compensation Cost

[We’re pleased to welcome back Pankaj M. Madhani, Associate Dean and Professor of ICFAI Business School (IBS).  Dr. Madhani is the author of “Optimal Salesforce Sizing and Compensation Cost: A Mathematical Approach” which appeared in Compensation and Benefits Review and is currently free to read for a limited time. From Madhani:]

CBR_42_1_72ppiRGB_powerpointWhat motivated you to pursue this research?

Each year businesses across the globe spend a massive amount on salesforce investment. The salesforce is the engine that drives not only revenue of organizations but also represents a large percentage of total costs for sales organizations. As such salesforce is a sales generator as well as a cost generator. Deciding on the proper size of the salesforce is a strategic management issue because it has major impact on sales organization’s revenues, cost and profits. A properly sized salesforce maximize the economic return on investment of selling resources. Determining the most appropriate salesforce size is dependent on a number of factors, such as stages of business life cycle, the use of selling partners, sales carryover rate, productivity of salesforce, and turnover of the sales staff. Hence, looking into complexity and interdependency of these issues, there is need of an analytical model to estimate optimal salesforce size.

In what ways is your research innovative, and how do you think it will impact the field?

Salesforce is one of the most important strategic levers for improving growth, market share, and profitability of sales organizations. However, sales organizations often use decision rules that rely on common sense rather than precise analytics to determine how large their salesforce should be. This research provides an analytical model for practicing managers to determine optimal size of salesforce based on a three-year ROI. This model eliminates two most common errors i.e. type I and II errors and thus help sales organizations make good salesforce sizing decisions. Type I error refers to over sizing error while type II error refers to under sizing errors. With use of the model, salesforce sizing errors could be avoided to boost top line as well as bottom line performance of sales organizations. The model developed in this research mathematically calculated ROI for different break-even ratios and across various levels of sales carry over. This relationship provides a valuable criteria check of whether a salesforce may be undersized, oversized or optimally sized.

What advice would you give to new scholars and incoming researchers in this particular field of study?

With optimal salesforce sizing decision, organizations could improve their performance by changing their salesforce size at a right time. Yet, there are many internal and external factors impacting sizing decisions such as strategic objectives, product maturity, competitive environment, market trends and financial goals. All these factors together determine optimal ROI for salesforce investment. Thus, there is need to empirically establish relationship among these factors to identify mediating variables.

Pankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University. He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as an associate dean and professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed journals. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published more than 20 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

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Big-Science Organizations as Lead Users: A Case Study of CERN

switzerland-93275_1920[We’re pleased to welcome authors Poul Andersen of Aalborg University, Denmark and Susanne Åberg of Uppsala University, Sweden. Andersen and Åberg recently published an article in the Competition and Change entitled “Big-science organizations as lead users: A case study of CERN,” which is currently free to read for a limited time. Below, Andersen reflects on the inspiration for conducting this research:]

ccha_21_3.coverWhat kind of customer is CERN – the leading research organization for nuclear research in Europe – and what can a supplier learn from collaborating with them? In this paper we pursue questions that was originally raised by Susanne Åberg – one of the authors – during her study of collaboration between CERN and Swedish suppliers (see Åberg, S. (2013). Science in business interaction: A study of the collaboration between CERN and Swedish companies (Doctoral dissertation, Företagsekonomiska institutionen, Uppsala Universitet. The dissertation can be downloaded, using this link:  http://www.diva-portal.org/smash/get/diva2:575589/FULLTEXT01.pdf).

In the paper, forthcoming in Competition and Change, we pose the question: What characterizes interacting with big-science organizations as lead users and how does it impact on suppliers’ potential innovation benefits?

We depart from Von Hippel’s Lead user concept to scrutinize user-supplier interaction and learning. We find that the lead-userness of CERN differs from other lead users on a number of vital points. Big-science organizations (BSOs), such as CERN represent a special breed of lead users as their demands are not necessarily the avant-garde of a coming market. Yet, they may be leading in other ways: they provide a valuable test bed for suppliers, because they are pushing the boundaries of technological capacities and thus challenging suppliers’ talents. Also, they are prestigious collaboration partners that help producers to be acknowledged as being at the technology forefront. Moreover, they are often deeply engaged in their suppliers’ manufacturing and development activities, which is seen as a characteristic of the customer-active paradigm, upon which the lead user notion builds. This paper investigates whether and how interacting with CERN concerning their development needs may contribute to suppliers’ innovation.

We believe that both managers and designers of innovation policy may learn from our study. Viewing CERN and other BSOs as lead users change the traditional science-push perspective on knowledge dissemination from leading science. Managers considering engaging with CERN and other BSOs can also learn more about potential benefits and challenges from engaging with customers such as CERN.

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Do Economic Profit Companies Walk their Compensation Talk?

[We’re pleased to welcome author Mark E. Haskins of University of Virginia. Haskins recently published an article in the Compensation & Benefits Review entitled “Do Economic Profit Companies Walk their Compensation Talk? which is currently free to read for a limited time. Below, Haskins explains the significance of his research in the context of his other works:]

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This paper is the third in a series of Compensation & Benefits Review articles that explored the relationship between economic profit (EP) and executive compensation.  The first one, “Pay for Performance:  Keep it Simple and Value Focused,” Vol. 43, No. 2, 2011, described a four-step process for adjusting EBITDA, a widely used performance metric to evaluate operating managers, to approximate EP, a more shareholder-oriented profit metric. It was argued that the proposed approach could be easily understood and used by non-financial operating managers, rewarding and incenting them to the extent that earnings exceeded a risk-adjusted return on capital.

A second article, “Executive Compensation:  Do Economic Profits Matter?” Vol. 46, No. 5/6, 2014, sought to establish benchmarks for the share of EP that was actually paid to the executive teams at the largest public companies in the U.S.  The endeavor was unsuccessful, not due to the lack of data, but to the very weak, almost non-existent link between estimated EP and yearly “Named Executive Officer” (NEO) Average Total Compensation (NEO-ATC).  By far, the dominant empirical explanation for the differences in cross-company executive compensation levels was the difference in company size, whether measured by total assets or revenue.   The only statistically significant relationship between estimated EP and NEO-ATC was a slightly higher increase in compensation for companies reporting increases in estimated EP compared to those reporting decreases.  Among the reasons offered for the inability to find meaningful empirical benchmarks was that so few companies, in that study’s large sample, might actually employ an EP basis so that whatever patterns existed would be the proverbial “needle in the haystack”, and thus difficult to identify.

In this third investigation, a matched set of public companies was crafted to assess yearly NEO-ATC levels in those companies that report using EP (the EP firms) for executive compensation purposes versus a group of competing companies who do not.  Again, and as detailed in the article, although there is a stronger empirical relationship between changes in EP and changes in yearly NEO-ATC over the five years studied (2011-2015), there is no evidence of a strong cross-company relationship between yearly NEO-ATC levels and estimated EP, even within the sample of EP firms.  In short, EP appears to have had more theoretical appeal than discernible applicability to management and boards of directors.

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Can Unions, by Themselves, Help Curb CEO Pay?

[We’re pleased to welcome author Muhammad Umar Boodoo of the London School of Economics and Political Science. Boodoo recently published an article in the ILR Review entitled “Do heavily-unionized companies compensate their CEOs less in periods of financial distress?,” which is currently free to read for a limited time. Below, Boodoo reflects on the inspiration for conducting this research:]

ILR_72ppiRGB_powerpointWord on the street is that CEO pay is too high, and more must be done to curb it and reduce inequalities in society.  This topic is quite timely given that the World is still recovering from the effects of the financial meltdown.  The topic of CEO pay is fascinating in and of itself: why is it that some research find that CEO pay is not actually linked to corporate performance?  Why do CEOs still (seem to) earn sizeable bonuses and options when their companies are performing poorly?  These questions remain intriguing, and still attract the interest of various groups in society.  The primary question I ask in my paper is whether labor unions have any influence on CEO pay.  Unions are known to compress pay; they stand for fairness and strive to mitigate the inequalities in their workplaces and in society in general.  Some research also suggest that unions are bad for company profitability.  Is it possible, therefore, that unions reduce profits of companies and/or put pressure on compensation committees to reduce the pay of CEOs in companies where they are organised?

My paper finds that companies which are more heavily unionized tend to pay their CEOs higher salaries and pension benefits.  The same CEOs do not receive lower bonuses or lower options.  In other words, CEOs of densely-unionized companies get paid higher than their counterparts who manage low-unionized companies.  The first result about salaries and pension benefits is not such a surprise, considering that unions do tend to prefer fixed incomes over variable incomes for their own members, which may then also be the case for their management and CEO.  What may be a surprise is that unions do not reduce the profitability of companies, and do not reduce the sensitivity of CEO bonuses and options to corporate performance and market valuation of firms.  In other words, unions do not affect bonuses, options and restricted units of CEO pay.

While the results of this paper are based during the financial crisis, there are a few questions that need to be answered, perhaps in a more “normal” period.  If unions are not the answer to curbing CEO pay, then what can help?  Do we need employee representation on Boards of Directors so that there are more checks and balances?  Should we even be interested in curbing CEO pay, or should we rather focus on closing tax loopholes that allow CEOs (and others) to port money overseas to tax havens?  More research is also warranted on voluntary sorting of CEOs into companies.  It is plausible that older, more mature, experienced CEOs sort themselves into companies that are heavily unionized, while younger CEOs flock more towards lower-unionized firms.  Older CEOs may also be more risk-averse and may prefer higher fixed incomes and security.  They may not care too much about performance-related pay such as bonuses and equity compensation, and may in fact support rather than thwart unions.  These are plausible research questions that need further investigation.

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Do Customers Assign Different Meanings to Different Acts of Compensation?

[We’re pleased to welcome author Holger Roschk of the Alpen-Adria-Universität Klagenfurt, Klagenfurt, Austria. Roschk recently published an article in the Journal of Service Research entitled “Compensation Revisited: A Social Resource Theory Perspective on Offering a Monetary Resource after a Service Failure,” which is currently free to read for a limited time. Below, Roschk reflects on the inspiration for conducting this research:]

dollar-531639_960_720One of the many propositions by social resource theory comprises that people assign different meanings to the same action. Being a great fan of mafia movies, this idea intrigued me as it nicely reflects the popular “kiss of death” metaphor. While a kiss is usually considered as something positive, it can also — as portrayed in these very special movie situations mean that a person has fallen in disgrace.

Fascinated by this idea, we wanted to see if complainants assign different meanings to an act of service failure compensation. In service recovery research, social resource theory has been employed in promising ways such as explaining the situational desirability of recovery efforts. Accordingly, it seemed logical to take the next step and see if varying the properties of one and the same resource—in our case money—impacts recovery effectiveness.

With this purpose in mind, we also had to deal with a couple of challenges. One of them was the above mentioned issue that people attach different meanings to the same action. It is not reported in the article, but it was quite interesting. Accidentally, in one of our tests we manipulated the compensation act in such a way that respondents seemed to assign a negative meaning, eventually leading to obstructive effects which was exactly the contrary of what we wanted to achieve.

People often talk about money in terms of “money is money—so why should one care about how it is given?” Finding that complainants actually do care about how they are compensated in a recovery situation is an interesting new perspective for practitioners and researchers alike. Practitioners in particular learn about an outcome relevant property allowing to facilitate recovery outcomes without additional monetary costs. Further, they learn about an interesting side effect. Specifically, we observed that handing over the money in a personal and tangible way can be used to increase monetary returns to the firm in the form of tipping and cross-buying.

With regards to the research community, we hope that future scholars also draw on social resource theory in order to broaden our understanding of service failure and recovery, especially as SRT comprises many more propositions not yet considered.

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Designing Compensation Strategy with Game Theory Perspectives

[We’re pleased to welcome back Pankaj M. Madhani, Associate Dean and Professor of ICFAI Business School (IBS). Dr. Madhani is the author of “Salesforce Control and Compensation System: A Game Theory Model Approach which appeared in Compensation and Benefits Review, Volume 47, Issue 4, and is currently free to read for a limited time. From Madhani:]

The performance of a sales organization is positively influenced by ethical behavior of sales people. The design of salesforce control and compensation system is crucial in salesforce management as it plays an important role in influencing ethics of salespeople. To understand this relationship, this research applies game theory model in the areas of salesforce control and compensation system.

The propensity for sales people to make unethical choices can be reduced by designing an appropriate salesforce control system and a relevant compensation plan. Ethical behavior in sales organization can also be influenced by various organizational drivers such as ethical climate, code of ethics, hiring, selection and training process and ethical leadership. By such organizational influences, if a salesperson is motivated to act ethically by putting high efforts for building long term customer relationships, trust and loyalty, it results into a win-win situation for both sales people and the organization. Research has developed various frameworks, models and payoff matrices to validate application of game theory in the field of salesforce compensation. After considering multiple scenarios in the game to identify optimal payoff, research concludes that a sales organization is better off with outcome control when sales people behave honestly as it has the highest payoff among all other possibilities.

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Pankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University.

He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with theOutstanding Young Managers Award. He is now working as a professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed academic and practitioner journals such as World at Work Journal and the European Business Review. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published 19 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

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Salesforce Control and Compensation System: A Game Theory Model Approach

Optimal Compensation Strategy during the Growth Stage: A Financial Modelling Approach

[We’re pleased to welcome Pankaj M. Madhani, Associate Dean and Professor of  ICFAI Business School (IBS). Dr. Madhani is the author of “Managing Salesforce Compensation During the Growth Stage A Financial Modelling Approach which appeared in most recent issue of Compensation and Benefits Review, Volume 47, Issue 5/6. From Madhani:]

The salesforce is a strategic lever of the sales organization for improving sales growth, market share and profitability. Although, the salesforce is a critical component to the overall success of the sales organization’s goals and objectives, it’s also a cost generator, influencing not only the cost of the salesforce but also the variable expenses associated with sales volume. The salesforce design (i.e. salesforce size and structure) has major impact on compensation policies and practices of sales organizations as it’s influenced by organizational and environmental variables.

The size and structure of the salesforce significantly impact the operation of salesforce in terms of efficiency and effectiveness and hence it needs to change as the sales organization enters the growth stage. It is mainly because these attributes have highest impact on overall success of sales organization in the growth stage compared to other stages of business life cycle. However, designing an optimal salesforce size and structure is an intricate task. This study looks into this area and develops various methodologies, matrices and analytical tools to determine optimal salesforce size and the right balance between generalized and specialized sales roles in the salesforce structure during growth stage. At optimal salesforce size and corresponding structure, sales organization is able to attract, retain and motivate the ‘right’ type of sales people, build long term relationship with customers, gain market share, enhance profitability and thus maximize the value of sales organization. Research develops a financial model and provides a numerical illustration to calculate optimal salesforce size and structure.

pa.jpgPankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University.

He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as associate dean and professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed academic and practitioner journals such as World at Work Journal and the European Business Review. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published 19 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

Interested in submitting to Compensation & Benefits Review? Visit the Submission Guidelines page here!