How Changes in Compensation Plans Affect Employee Performance, Recruitment, and Retention—An Empirical Study of A Car Dealership

Abstract

This study reports that changes in compensation from performance-sensitive (commission-based) to less performance-sensitive (base salary plus commission) schemes hurt employee performance but do not impair the company`s. We analyzed performance data for 4,392 employees and 87 branches of a major Taiwanese car dealership over 56 months to test how the switch in compensation plan affects individual and firm performance. We find that individual sales productivity, especially that of high-performance salespersons, decreased once the compensation plan changed. Consistent with the predictions of selection effects, our results indicate that the less performance-sensitive plan retained fewer high-performance salespersons and recruited more low-performance sales staff. Contrary to the prediction based on incentive and selection effects, our findings show an increase, not decrease, in the branch performance during this period. This is because the company took various actions (e.g., promote more credit sales, push sales of accessories) to mitigate the loss due to lower employee productivity.