The Impact of Monitoring versus Monetary Incentives on Retail Sales Productivity

1. The Impact of Monitoring versus Monetary Incentives on Retail Sales Productivity Rajiv D. Banker* Seok-Young Lee** Jose M. Plehn-Dujowich* *Fox School of Business, Temple University **Sungshin Women’s University, South Korea June 7, 2014 1

2. Monetary Incentives • Monetary incentives serve two functions • Motivate effort: resolve moral hazard (MH) (Jensen and Meckling, 1976; Holmstrom, 1979) • Serve as screening device: resolve adverse selection (AS) (Murphy, 1986; Milgrom and Roberts, 1992) • Evidence is mixed as to their effectiveness • Positive (Banker et al., 1996a, 1996b) • Insignificant (Cravens et al., 1993) • Negative (Challagalla and Shervani, 1996)

3. Monitoring • Role of monitoring in agency theory • Monitor effort to alleviate MH (Basu et al., 1985; Lal and Srinivasan, 1993; Joseph and Thevaranjan, 1998; Slater and Olson, 2000; Lambert, 2001) • Role of monitoring in organizational (behavior-based) control theory • Monitoring not as effective when have low task programmability (Anderson and Oliver, 1987; Eisenhardt, 1985, 1988; Ouchi, 1979) • Creativity dampened by monitoring (Deci et al., 1989; Oldham and Cummings, 1996; Zhou, 2003)

4. Outline of Presentation • Principal-agent model with MH, which predicts: • Monitoring improves performance • Monetary incentives improve performance • Marginal benefit of monitoring diminishes when have monetary incentives • Optimal level of monitoring is greater when have no monetary incentives • Evidence from chain of department stores, half of which use monetary incentives • First stage: DEA analysis • Second stage: OLS regressions of sales productivity agree with model’s predictions

5. A Principal-Agent Model with MH • Risk-neutral manager hires risk-averse salesperson • Salesperson exerts two types of effort • Routine: • Creative: • Sales productivity: • Monitoring signal: • Greater monitoring increases precision: • Timing of the game • Stage 1: Manager sets level of monitoring m • Stage 2: Manager designs compensation scheme • Stage 3: Salesperson exerts effort

6. Compensation Schemes • No monetary incentives • Contract on monitoring signal: • Performance • Sales productivity: • Profits of manager: • Monitoring improves performance: • Monetary incentives • Contract on monitoring signal & sales productivity: • Performance • Sales productivity: • Profits of manager: • Monitoring improves performance:

7. Monitoring vs. Monetary Incentives • Monetary incentives improve performance • Sales productivity: • Profits of manager: • Marginal benefit of monitoring diminishes when have monetary incentives, if creative effort is important: • Sales productivity: • Profits of manager: • Thus, optimal level of monitoring is greater when have no monetary incentives

8. Sample and Variables • Dataset: chain of mid-end department stores, each store is a decision-making unit (DMU), 60 months • 10 stores offer sales commission • 10 control stores in same geographic region do not • Two-stage estimation (Banker and Natarajan, 2008) • First stage: DEA analysis of sales productivity (Banker, Charnes, and Cooper, 1984) • Output: store SALES • Inputs: total selling HOURS, store SIZE, average INVENTORY • Second stage: perform OLS regression of DEA scores • MONITORING = managerial hours/total selling hours • MONINCENT dummy = 1 if have sales commission