Who Should Compensate the Sales Agent in a Distribution Channel?

We analytically study a value chain consisting of three independent parties: a manufacturer, a retailer, and a sales agent. Either the manufacturer or the retailer may compensate the sales agent, and a variety of supply contracts may be used between the manufacturer and the retailer: price‐only, buyback, and channel rebate. We first compare the efficiency of different supply contracts under either compensation scheme, and then compare the two compensation schemes when executed with the best performing supply contract for the parameter range. Under manufacturer compensation, we find that the price‐only contract may perform well in encouraging sales effort and it can dominate the distribution channel coordinating contracts in certain parameter (production and sales effort costs) range. Under retailer compensation, we find that, within the value chain, the buyback contract performs better in quantity coordination and the channel rebate contract performs better in sales effort coordination. Interestingly, our results show that an appropriate supply contract in support of a salesforce compensation scheme helps mitigate the inefficiency brought by the asymmetric sales effort information, and can lead to value chain first best for a wide range of parameters. When this is not the case, manufacturer compensation executed via the price‐only contract dominates for stable demand markets and retailer compensation executed via channel rebate contract dominates when the market’s uncertain outcomes are distinct.