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A field study of the impact of changes to a net sales-based incentive plan and centralized inventory management

ABSTRACT Although empirical studies have shown an increase in store sales following the implementation of performance-based incentive plans for the salesforce, they rarely consider inventory decisions and do not clarify the consequences of organizational design choices. Using data from 78 retail stores in a case study of a firm’s accounting records from January 2013 to December 2014, this study examines how store managers reacted to changes in (i) performance measurement choices in contracting and (ii) authority over inventory decisions after the mandatory adoption of the International Accounting Standards 2 (IAS 2), which increased the visibility of high inventory costs, and whether the underlying changes improved the gross profit percentage. The case firm switched from a sales-based incentive plan for store managers with a decentralized inventory structure to a net sales-based incentive plan combined with centralized inventory systems. Under the net sales-based incentive plan, store managers can receive bonuses only if losses on inventory valuation were deducted from sales revenue. The empirical evidence shows that performance measurement choices related to salesforce compensation in conjunction with inventory management systems result in increases in a retail store’s gross profits and decreases in losses on inventory valuation.