An Optimal Plan for Salesmen's Compensation

Abstract

A sales compensation plan paying equal commission rates on the gross margins of the products in a salesman's line is shown to be optimal. Under such a plan a salesman trying to maximize his commissions simultaneously maximizes his contribution to company profits. The plan can also handle problems such as loss leaders and capacity constraints with minor modifications. The plan appears operational and may help simplify formal quota and control systems now needed under other compensation programs.