Compensation and Peer Effects in Competing Sales
Teams
Jia Li†
Job Market Paper
(Joint work with Tat Chan and Lamar Pierce)
Abstract. In retail management, one of the fundamental and critical decisions for managers is
how to motivate, staff, and organize their sales force. This task becomes more challenging when
employees work in teams so that their productivity will be influenced by peers. Recent work
empirically demonstrates peer effects in single-firm work settings under one compensation
structure, but these studies leave important questions unanswered. We use a three-year dataset of
Chinese cosmetic sales transactions to examine how compensation and firm boundaries influence
worker productivity spillovers and sales strategies. We demonstrate three important new sets of
findings. First, while high-ability workers under the team-based compensation system
significantly improve the sales productivity of their peers, under individual-based compensation
they have a strong negative effect on peers while gaining little in the process. Second, we find
that peer effects exist across firm boundaries, with workers at team-based compensation counters
more capable in competing against peers at other counters. Third, when faced with high-ability
peers, workers under individual-based compensation respond by strategically discounting prices
offered to customers and focusing on retaining high-value customers who may be more brand
loyal. Our results suggest that while heterogeneity in worker productivity enhances total team
performance under team-based compensation, it impacts firms with individual-based
compensation negatively. This paper provides a unique contribution to the literature by being the
first to simultaneously estimate peer productivity spillovers both within and across firms under
multiple compensation systems. It is also the first identifying how workers respond to peer
effects with discretionary strategies, and provides important...