Homogenous Contracts for Heterogeneous Agents: Aligning Salesforce Composition and Compensation∗

Observed contracts in the real-world are often very simple, partly reflecting the constraints faced by contracting firms in making the contracts more complex. We focus on one such rigidity, the constraints faced by firms in fine-tuning contracts to the full distribution of heterogeneity of its employees. We ex-plore the implication of these restrictions for the provision of incentives within the firm. Our application is to salesforce compensation, in which a firm maintains a salesforce to market its products. Consistent with ubiquitous real-world business practice, we assume the firm is restricted to fully or partially set uniform commissions across its agent pool. We show this implies an interaction between the composition of agent types in the contract and the compensation policy used to motivate them, leading to a “contrac-tual externality ” in the firm and generating gains to sorting. This paper explains how this contractual externality arises, discusses a practical approach to endogenize agents and incentives at a firm in its presence, and presents an empirical application to salesforce compensation contracts at a US Fortune 500 company that explores these considerations and assesses the gains from a salesforce architecture that sorts agents into divisions to balance firm-wide incentives. Empirically, we find the restriction to homogenous plans significantly reduces the payoffs of the firm relative to a fully heterogeneous pla