This paper presents a theory of multi-period salesforce compensation in which a firm experiences a production learning effect. Firm management uses the salesforce compensation plan to promote current period sales (and production) in order to lower future period production costs. The firm management (principal)-salesperson (agent) relationship is modeled as an agency relationship. The model is a two-period extension of the Basu, Lal, Srinivasan and Staelin (1985) one-period agency model of salesforce compensation. We demonstrate that (relative to the results for the one-period model) firm management should, in the first period, decrease the salary portion of the compensation plan and increase the commission rate (as a percentage of sales). Such changes in the compensation plan motivate the salesperson to increase first period sales effort. The firm is able to increase discounted two-period expected profit by considering production dynamics in this compensation plan. We discuss managerial implications of our model.
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