Quota bonuses in a principle-agent setting

Theoretical articles on incentive systems almost excusively focus on linear compensations, while in practice, nonlinear elements, eg. quota bonuses are not uncommon. Our article tries to bridge that gap and show how the use of quotas can increase the owners’ profit.

Quota bonuses as localized sales bonuses

Managerial bonus schemes and their effects on firm strategies and market outcomes are extensively discussed in the literature. Though quota bonuses are not uncommon in practice, they have not been analysed so far. In this article we compare quota bonuses to profit-based evaluation and sales (quantity) bonuses. In a duopoly setting with independent demand shocks we find that under certain circumstances choosing quota bonuses is a dominant strategy. This may explain the widespread use of quota bonuses in situations where incentive problems are relevant.