To What Extent Do Commissions and Bonuses Impact the Performance of Car Salesmen?

MN20414 - Research Project

To what extent do commissions and bonuses impact the performance of car salesmen?

Group 22

Daoud Abdellatif, Yik Chan, Julien Chauve, Arthur de Gibon, Simon Visser

Word Count: 3986

Abstract

In this pilot study, the impact of two forms of pay-for-performance incentive schemes, commission and bonuses, on the productivity of car salesmen is examined in the context of the UK car industry. Thanks to data gathered from surveys distributed to car dealerships, the relationship between incentives, motivation and performance is examined. It is deduced that these incentive schemes increase the motivation of car salesmen. Since motivation is found to be positively correlated with performance, commissions and bonuses increase performance. In addition to this, commissions are more effective than bonuses in improving performance, whilst using both schemes simultaneously offer a greater increase in performance than commissions alone. With particular attention paid to the levels of incentives and targets, managers can implement these schemes to improve job satisfaction, and ultimately performance.

Introduction

Pay-for-performance is nowadays widely used by organisations to motivate their members in order to achieve better performance (Baker, Murphy, & Jensen, 1988). Many managers and workers across different industries are remunerated for their effort according to their performance (Ariely, Gneezy, Lowenstein & Mazar, 2009).  Prior studies have shown some evidence of the efficiency of pay-for-performance (Cadsby, Song, & Tapon, 2007; Lazear, 2000), especially with piece rate. However, much controversy exists over the relationship between this incentive system and productivity. In fact, various studies conducted on the effect of financial rewards on performance gave mixed results (Camerer and Hogarth, 1999; Hastie, & Sprinkle, 2000).

Given the contentious nature of the studies in literature, this paper will explore the key issue of whether, and to what extent, financial rewards have an impact on motivation, and subsequently performance of car dealers. Specifically, our pilot study will address the shortfalls of ‘Performance Pay and Productivity’ (Lazear, 2000), that evaluates the effects of a piece rate system on the performance of workers in an American glass factory. This will be achieved by examining the effects of two types of pay-for-performance schemes, commission and bonuses on several car dealerships in the Bath and Bristol area. Under a commission scheme, the salesman will earn a fixed rate of the profit made on the sale of a car, whereas bonuses are defined as the extra income received by salesmen when they reach certain targeted level of sales or when they sell a specific model.

The automotive industry is chosen for several reasons. Firstly, the nature of task is very different to a glass factory, where tasks are largely physical. Indeed, car salesmen utilise more comprehensive set of skills in their role. Moreover, our report focuses on the service industry, whereas Lazear’s (2000) study was based on the manufacturing industry. Secondly, whereas Lazear’s study focuses on piece-rate pay alone, the chosen car dealerships of this study predominantly have two forms of incentive schemes: commissions and bonuses. This will allow for a greater and more in-depth analysis on the effects of financial incentives. Finally, by basing our study on evidence provided by real business entities rather than results from laboratory experiments (Bonner & Sprinkle, 2000; Fessler, 2003; Ariely, Gneezy, Lowenstein & Mazar, 2009), the implications for managers will be more relevant in commercial contexts.  

Theoretical Background and Hypotheses

The relationship between financial incentives and performance is not straightforward, and task performance can be influenced by a multitude of factors that interact with each other (Jenkins, Gupta, Shaw, & Mitra, 1998). In order to better understand this relationship, Bonner and Sprinkle (2002) provide a conceptual framework that is split into a two-stage process. First, this model describes the mechanisms through which monetary incentives lead to higher level of effort and motivation. Then, higher degrees of motivation are presumed to result in improved performance. However, this relationship is moderated by numerous variables such as the type of task, individual skillset and the complexity of task. Regarding the type of task, a study conducted by Ariely, Gneezy, Loewenstein, and Mazar (2009) shows that pay may have a stronger effect on performance when physical tasks are involved, rather than with cognitive tasks. Task complexity also plays a major role as, Bonner and Sprinkle (2002) found that incentives can have a lower impact on performance when task are more complex, one of the reasons being the low level of individual skill. Thus, these studies suggest that complex and cognitive tasks tend to lead to low levels of performance when performance pay is introduced.

Another moderating factor in the pay-productivity relationship that has not been discussed previously is the impact of the different types of incentive schemes on performance. According to Bonner, Hastie, & Sprinkle (2000), different types of incentives give rise to different performance levels. In particular, the study claims that quota schemes have “the highest likelihood of evincing positive incentive effects” (Bonner, Hastie, & Sprinkle, 2000) compared to piece-rate. In our study, commission can be associated to piece-rates and bonuses to quota schemes. However, all of these studies are based on laboratory experiments rather than real world observations, which may become a challenge to the validity of these studies.

With the above in mind, this study aims to give some real world evidence on the effects of commissions and bonuses on the performance of car salesmen in the automotive industry. To better define the nature of the role of a car salesmen, from our survey 83% of respondents ranked their job as either complex or very complex. Furthermore, they believed multiple cognitive elements were involved in their jobs including decision-making, judgment and reasoning.

Based on the issues raised above, we present the following hypotheses: