On the Performance of Quota-based Compensation Scheme for Heterogeneous Salesforces

This paper examines the performance of quota-based compensation scheme relative to the menu of linear contracts in a principal-agent problem under moral hazard and adverse selection. A firm compensates heterogeneous workers based on uncertain outcomes of the worker’s private skill and effort. I derive an analytical expression for the performance measure of simple contract and provide explicit upper and lower bounds on the relative performance. A primary finding is that a properly designed simple piece-wise-linear-threshold contract always captures more than 73 percent of the incremental gain secured under the optimal menu of linear contracts on the entire region of the relevant parameter values