1. The Impact of Monitoring versus Monetary Incentives on Retail Sales Productivity
Rajiv D. Banker*
Seok-Young Lee**
Jose M. Plehn-Dujowich*
*Fox School of Business, Temple University
**Sungshin Women’s University, South Korea
November 11, 2018
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2. Monetary Incentives Monetary incentives serve two functions
Motivate effort: resolve moral hazard (MH) (Jensen and Meckling, 1976; Holmstrom, 1979)
Serve as screening device: resolve adverse selection (AS) (Murphy, 1986; Milgrom and Roberts, 1992)
Evidence is mixed as to their effectiveness
Positive (Banker et al., 1996a, 1996b)
Insignificant (Cravens et al., 1993)
Negative (Challagalla and Shervani, 1996)
November 11, 2018

3. Monitoring Role of monitoring in agency theory
Monitor effort to alleviate MH (Basu et al., 1985; Lal and Srinivasan, 1993; Joseph and Thevaranjan, 1998; Slater and Olson, 2000; Lambert, 2001)
Role of monitoring in organizational (behavior-based) control theory
Monitoring not as effective when have low task programmability (Anderson and Oliver, 1987; Eisenhardt, 1985, 1988; Ouchi, 1979)
Creativity dampened by monitoring (Deci et al., 1989; Oldham and Cummings, 1996; Zhou, 2003)
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4. Outline of Presentation
Principal-agent model with MH, which predicts:
Monitoring improves performance
Monetary incentives improve performance
Marginal benefit of monitoring diminishes when have monetary incentives
Optimal level of monitoring is greater when have no monetary incentives
Evidence from chain of department stores, half of which use monetary incentives
First stage: DEA analysis
Second stage: OLS regressions of sales productivity agree with model’s predictions
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5. A Principal-Agent Model with MH
Risk-neutral manager hires risk-averse salesperson
Salesperson exerts two types of effort
Routine:
Creative:
Sales productivity:
Monitoring signal:
Greater monitoring increases precision:
Timing of the game
Stage 1: Manager sets level of monitoring m
Stage 2: Manager designs compensation scheme
Stage 3: Salesperson exerts effort
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6. Compensation Schemes No monetary incentives Monetary incentives
Contract on monitoring signal:
Performance
Sales productivity:
Profits of manager:
Monitoring improves performance:
Monetary incentives
Contract on monitoring signal & sales productivity:
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7. Monitoring vs. Monetary Incentives
Monetary incentives improve performance
Sales productivity:
Profits of manager:
Marginal benefit of monitoring diminishes when have monetary incentives, if creative effort is important:
Thus, optimal level of monitoring is greater when have no monetary incentives
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8. Sample and Variables
Dataset: chain of mid-end department stores, each store is a decision-making unit (DMU), 60 months
10 stores offer sales commission
10 control stores in same geographic region do not
Two-stage estimation (Banker and Natarajan, 2008)
First stage: DEA analysis of sales productivity (Banker, Charnes, and Cooper, 1984)
Output: store SALES
Inputs: total selling HOURS, store SIZE, average INVENTORY
Second stage: perform OLS regression of DEA scores
MONITORING = managerial hours/total selling hours
MONINCENT dummy = 1 if have sales commission
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