Vol. 00, No. 0, Xxxxx 0000, pp. 000–000 issn 0000-0000 | eissn 0000-0000 | 00 | 0000 | 0001 Working paper doi 10.1287/xxxx.0000.0000 c  0000 Working paper Threshold Incentives and the Sales Hockey Stick Milind G. Sohoni Indian School of Business, Gachibowli, Hyderabad 500032, India, milind sohoni@isb.edu Achal Bassamboo Kellogg School of Management, Northwestern University, IL 60208, a-bassamboo@kellogg.northwestern.edu Sunil Chopra Kellogg School of Management, Northwestern University, IL 60208, s-chopra@kellogg.northwestern.edu Usha Mohan Hyderabad Central University, Gachibowli, Hyderabad 500032, India, ushamohan69@gmail.com Nuri Sendil IEMS, Northwestern University, IL 60201, nsendil@northwestern.edu In this paper we study threshold-based sales-force incentives and their impact on a dealer’s optimal effort. A phenomenon, observed in practice, is that the dealer exerts a large effort towards the end of the incentive period to boost sales and reach the threshold to make additional profits. In the literature, the resulting last period sales spike, is sometimes called the hockey stick phenomenon (HSP.) We show that lack of information leads to the HSP and characterize its form over multiple time periods. Under perfect information it is possible to completely eliminate the HSP, however, this may be difficult in practice. We show that the manufacturer can control the HSP by using imperfect information to set the threshold and delay its computation until the last period. We discuss an implementation plan that allows the manufacturer to do so. We then study the impact of competition on the HSP and show conditions under which the HSP can be dampened or exacerbated. We also characterize the variance of the total sales across all the periods and demonstrate conditions under which offering a bonus contract may be beneficial in controlling the variance. Subject classifications : sales force incentives, sales hockey stick Area of review : Manufacturing, Service and Supply Chain Operations History : Last revised: September 27, 2007 1. Introduction Many firms offer quota-based sales-force compensation plans to motivate their sales-force to work harder and increase sales. Typically, under such sales-force compensation plans the dealer (sales- person) is paid an additional amount per unit when sales exceed a threshold 1 (sales quota) value; sometimes, instead of an additional per unit (marginal) payment, a fixed bonus is offered if the total sales figure exceeds the threshold. One example of a threshold-based sales-force incentive mechanism is the so called stair-step incentive offered by auto-manufacturer Chrysler to it’s dealers 1 We use the terms threshold and quota interchangeably throughout this paper. 1