SALES TARGET SETTING IN B2B

Sales Target Setting In B2B in the Context of FMCG

Sales Target Setting In B2B in the Context of FMCG

I. Introduction

This paper examines supervisor discretion in target setting. Specifically, in a context in which overall regional sales targets are dictated by corporate headquarters, we analyze how regional directors (supervisors) use their discretion to allocate regional sales targets to individual stores in the region. Understanding how performance targets are set is important because such targets play a key role in many aspects of management accounting and control. For instance, in the area of performance evaluation, targets communicate supervisors' expectations and directly influence employee incentives, as meeting or exceeding targets leads to increased short- and/or long-term compensation. Despite the importance of targets, however, our knowledge of supervisor target-setting behavior is limited.

A considerable amount of research examines the related topic of goal setting. Much of this literature addresses the level of target achievability that is optimal for eliciting employee performance (see, e.g., Locke and Latham 1990). The results from this goal-setting literature, however, do not provide clear insight into supervisors' target-setting behavior. For example, Merchant and Manzoni (1989) find that supervisors set targets at substantially more attainable levels (i.e., at levels with a higher probability of achievement) than the goal-setting theory predicts. The authors' interview data indicate that the targets are more attainable than predicted because eliciting high levels of employee performance is not supervisors' only concern. Other factors, such as increasing the predictability of budgets or discouraging earnings management, also influence supervisors' target-setting decisions. To date, however, there exists little empirical evidence on the array of factors influencing supervisors' target-setting decisions and methods (Ittner and Larcker 2001; Anderson et al. 2009). We address this void in the literature by 2 analyzing how directors strategically use their discretion in the target-setting process to deal with compensation contracting issues.

Specifically, we begin by examining whether directors use their discretion to manage compensation risk. Consistent with predictions based on agency theory, we hypothesize that directors provide more attainable targets to stores that face higher levels of store-specific risk.

Next, we study whether discretion is used to mitigate fairness concerns. Drawing on behavioral theory, we predict that directors will provide more attainable targets to stores when other elements of the compensation plan are taken to be unfair. Finally, we analyze whether directors use their discretion in the target-setting process to minimize confrontation costs. Consistent with research in psychology, we hypothesize that directors provide easier targets to store managers with relatively higher hierarchical status.

We test our predictions using archival data across multiple years and organizational business units. In particular, we employ a rich dataset from the population of 103 business units (referred to as stores) managed by a postal service provider in Korea for the period 2000 to 2003.1 Our research setting offers important advantages in examining the use of discretion in target setting. First, our data include initial store targets, which are calculated by applying an established formula to the regional targets set by corporate headquarters, ...