Compensation and Peer Effects in Competing Sales Teams

Abstract

In retail management, one of the fundamental and critical decisions for managers is how to motivate, staff, and organize their sales force. This task becomes more challenging when employees work in teams so that their productivity will be influenced by peers. Recent work empirically demonstrates peer effects in single-firm work settings under one compensation structure, but these studies leave important questions unanswered. We use a three-year dataset of Chinese cosmetic sales transactions to examine how compensation and firm boundaries influence worker productivity spillovers and sales strategies. We demonstrate three important new sets of findings. First, while high-ability workers under the team-based compensation system significantly improve the sales productivity of their peers, under individual-based compensation they have a strong negative effect on peers while gaining little in the process. Second, we find that peer effects exist across firm boundaries, with workers at team-based compensation counters more capable in competing against peers at other counters. Third, when faced with high-ability peers, workers under individual-based compensation respond by strategically discounting prices offered to customers and focusing on retaining high-value customers who may be more brand loyal. Our results suggest that while heterogeneity in worker productivity enhances total team performance under team-based compensation, it impacts firms with individual-based compensation negatively. This paper provides a unique contribution to the literature by being the first to simultaneously estimate peer productivity spillovers both within and across firms under multiple compensation systems. It is also the first identifying how workers respond to peer effects with discretionary strategies, and provides important implications for managerial decisions on staffing, compensation, and pricing discretion. Finally, the paper implements an improved methodology that generates more efficient estimators than those in previous studies.

Prior ties and the limits of peer effects on startup team performance

“…The idea that peer effects drive performance is not new. Such effects have been demonstrated in diverse contexts including retail (Mas & Moretti, ; Chan, Li, & Pierce, ), finance (Hwang, Liberti, & Sturgess, ), and scientific innovation (Azoulay, Graff‐Zivin, & Wang, ; Catalini, ; Oettl, ). Peers share knowledge, provide help, and set performance expectations (e.g., Herbst & Mas, ; Housman & Minor, ; Mas & Moretti, ).…”

The Impact of Peer Presence on Cheating

“…As previous studies have shown that the degree of undesirable behavior such as cheating also depends on monetary incentive schemes (see Freeman and Gelber 2010;Harbring and Irlenbusch 2011) and that compensation systems have an impact on peer effects (Chan, Li, and Pierce 2014), we implement two different payoff schemes to test for the sensitivity of our results. In the first, subjects receive a piece rate.…”

PEER EFFECTS IN A COMPETITIVE ENVIRONMENT: EVIDENCE FROM THEPGATOUR

“…The optimal pairing of peers based on ability may be an interesting line of future research. However, we can speculate as it relates to the general results in Chan, Li, and Pierce (). If a worker is able to learn from a peer, then workers should be paired with a superior peer as this will lead to greater overall output compared to a pairing with an inferior peer.…”

“…Herbst and Mas's () meta‐study of the peer effects literature in the workplace highlights this fact as they find that pay based on team output results in positive peer effects, while direct competition between workers results in negative effects. Moreover, Chan, Li, and Pierce () specifically examine compensation schemes (team vs. individual commissions) in cosmetic sales and find positive peer effects with team pay and negative effects with individual pay. There are three studies of which we are aware that study peer effects in a tournament setting, two of which involve golf (Brown ; Guryan, Kroft, and Notowidigdo ), while the last examines the National Spelling Bee (Smith ).…”