Impact of stair-step incentives on sales variance

In many industries, manufacturers give dealers and other sales representatives incentives to increase sales. In my dissertation, I focus on the impact of these incentives on sales variance. Because increase in sales variance increase manufacturers' costs, such as the need for extra capacity and inventory.I focus on incentives where dealers are given a lump-sum bonus for crossing a specified sales quota. This is a common form of incentive used in practice. I assume that sales is the combination of a market signal and the dealer's effort, which the dealer decides after observing the market signal. In this exclusive dealer case giving a lump-sum bonus for reaching a quota, not only increases expected sales but can also decrease the variance of sales.There are many instances, however, where dealers represent more than one manufacturer. I model one dealer with two identical manufacturers and show that in a non-exclusive setting, stair-step incentives offered by both manufacturers can increase their sales variances. With a non-exclusive dealer, the manufacturer may be better off using a constant margin bonus rather than offering a stair-step incentive.Earnings management is a topic heavily researched in accounting. I assume that the dealer also has the ability to management of sales. I model an exclusive dealer with the ability to shift sales between periods without loss. Under some conditions, the dealer's ability to shift sales helps to decrease sales variance more than just the incentive. Thus, the manufacturer may be better off letting the dealer to manage sales as long as there is no loss in sales.I also investigate how a stair-step incentive may cause hockey-stick phenomenon, where sales increase towards the end of a period, which indicates sales variance inside a period. I model a dealer with two decision periods while the manufacturer has one incentive period. I show that the variation in the dealer's effort across periods occurs because the sales quota is set before the start of the incentive period and waiting for more information benefits the dealer. I suggest that linking the quota to an economic indicator correlated to the market signal in order to smooth the effort level inside a period.