You are on page 1of 9

Industrial Marketing Management 33 (2004) 87 95

Designing channel incentives to overcome reseller rejection


David I. Gilliland*
Marketing Department, Colorado State University, 107 Rockwell Hall, Fort Collins, CO 80523-1278, USA
Received 16 January 2001; accepted 14 January 2003

Abstract
As more and more products are distributed through independent channel resellers, suppliers find it increasingly difficult to craft highly
motivational incentive packages. Instead, many suppliers product lines are neglected by resellers in deference to more compatible incentive
offers. This paper studies the many aspects of incentive rejection and incentive compatibility and prescribes a four-step, theory-based process
to help suppliers craft attractive incentive programs. The process involves identifying resellers performance needs, recognizing how each
need suggests a different basis for incentive rejection, and designing an incentive package such that the incentives support specific reseller
needs. Also, unique channel conditions are considered.
D 2003 Elsevier Science Inc. All rights reserved.
Keywords: Channels of distribution; Incentives; Governance; Cooperation

1. Introduction
Firms that sell through distribution use many different
governance mechanismssuch as incentive programs,
monitoring processes, and enforceable contractsto try to
control their independent resellers. Of the many mechanisms available, the channel incentive is generally recognized as the one most likely to motivate specific reseller
action (see Williamson, 1991). This is because incentive
arrangements can be crafted such that the reseller will
comply with the supplier in order to receive remuneration
of some kind. Because channel incentives are so closely tied
to specific performance, they play a key role in allowing
many suppliers to maintain productive relationships with
channel members.
On the other hand, suppliers often propose incentive
programs that fail to motivate resellers, causing the offered
incentive to be rejected outright (Narus & Anderson, 1996).
The rejection of an incentive is problematic because a
suppliers potential to control its channel cannot be realized
until the reseller accepts the offer and performs as specified
(Frazier, 1999). Unfortunately, the problem described,

* Tel.: +1-970-491-5224; fax: +1-970-491-5956.


E-mail address: dave.gilliland@colostate.edu (D.I. Gilliland).
0019-8501/$ see front matter D 2003 Elsevier Science Inc. All rights reserved.
doi:10.1016/S0019-8501(03)00031-2

reseller rejection, is so commonplace that Murry and Heide


(1998) suggest it is often the resellers default position.
One reason reseller rejection occurs is the inventory
overcrowding problem. Most channel intermediaries carry
multiple brands across many different product lines, making
it difficult to adequately represent all the brands and
products in inventory (some examples of overcrowding
are listed in Table 1). As the number of brands and products
increases, resellers become less able to give adequate
attention to all; those with less competitive incentive
arrangements may be routinely neglected.
Given the importance of channel incentive programs, the
purpose of this paper is to propose a four-step, theory-based
method for crafting compatible incentive packages for
independent channel intermediaries. In brief, the method
suggests designing channel incentives to be compatible
with resellers requirements to achieve high-performance
outcomes. Importantly, because there are multiple standards
for firm performance, resellers pursue diverse strategies,
which require different types of support from channel
suppliers in the form of channel incentives. This paper
prescribes a systematic process for evaluating the different
bases on which an incentive might be compatible with the
resellers performance needs and for configuring specific
incentive packages to address those needs. By understanding the type of support required by the reseller, channel

88

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

Table 1
Examples of reseller inventory overcrowding
Reseller

Brands and products represented

WB Wood, White Plains, NY (office furniture dealer)

Over 170 different brands across four product lines


(e.g., seating, modular furniture systems).
Over 100 different brands across 11 product lines
(e.g., light boxes, densitometers, and laminators) and
114 product categories, most with over 10 product types per category.
17 different product lines (e.g., heavy construction machinery,
paving equipment), 23 rental product lines, and 7 parts lines.
Within one product line, Power Motive reps 5 different brands,
14 different product categories, and over 180 separate product types.
Over 160 different product lines (e.g., cell culture products,
petri dishes, and filtration devices), most all with multiple brands,
multiple sizes and styles.
Over 150 different brands across 41 product lines (e.g., CD-ROMs,
keyboards, and notebook computers).
Many multibrand product lines including abrasives (six brands),
hand tools (seven brands), cutting tools (six brands),
power tools (five brands), and industrial supplies (seven brands).
Nine different product lines (e.g., forklift trucks, vertical storage systems),
most all with multiple brands (i.e., four forklift brands), multiple product
categories, and multiple sizes and styles.

Mini Lab Supply, Plymouth, MN (photographic supply wholesaler)

Power Motive, Denver, CO (construction machinery dealer)

Applied Scientific, So. San Francisco, CA


(laboratory equipment supply)
Bell Microproducts, San Jose, CA
(high-technology value-added distributor)
Eison Industrial and Hardware Supply, Norcross, GA
(industrial hardware dealer)
Equipco, Altoona, PA (materials handling equipment dealer)

suppliers can design compatible, and thus attractive incentive programs.

2. Channel incentives and the requirement for


compatibility
Channel incentives can be characterized as one of the
back-end dimensions of governance, along with monitoring and enforcement mechanisms, because they are
designed to keep a relationship on track by ensuring that
the suppliers front-end plans are executed as anticipated.
Channel incentives are defined as behaviors or policies
described in the suppliers standard operating agreement
that are designed to motivate active intermediary support of
the suppliers agenda (Gilliland, 2003). While these incentives are generally thought of in terms of margin discounts
or spiffs, practitioners actually use a complex array of
different tools-levers (Frazier, 1999, p. 229). In fact, in
Gillilands (2003) examination of high-technology suppliers channel programs, he found 173 unique channel incentives in use, which were classified into 5 major categories
and 16 subcategories. To illustrate the breadth of channel
incentives, the classification scheme is described in Table 2.
Anand and Stern (1985) suggest that a supplier can
control a channel decision only if the reseller is willing to
relinquish control of that decision, and it is more likely to
relinquish control if doing so will enhance its performance.
Thus, if an offered channel incentive does not contribute to
higher reseller performance, it becomes a candidate for
rejection. Suppliers that desire control have been instructed
to design a contract that will obtain the . . . best outcome
that is incentive compatible for the agent (Bergen, Dutta, &
Walker, 1992, p. 5). This suggests that it is in the suppliers

interest to craft incentive arrangements that are compatible


with the needs of channel resellers. Incentive compatibility
refers to the extent that the offered remuneration matches, or
is congruent with, the resellers performance goals. If the
incentive is rejected, the reseller will not support the suppliers product. Specifically, incentive rejection is the resellers
failure to actively pursue an offered channel incentive. Both
incentive compatibility and incentive rejection speak to the
resellers desire to attain higher levels of performance.
In order to design reseller-compatible incentive arrangements, suppliers may consider how an incentive contributes
to, or detracts from, resellers performance-related concerns.
With this in mind, a systematic four-step process is now
specified crafting compatible channel incentives by identifying and addressing resellers concerns. The process is
illustrated in Fig. 1, and summarized in Table 3 is a matrix
that organizes the relationship among performance concerns, bases for incentive rejection, incentive control characteristics, and recommended incentive programs.

3. Step 1: Identifying reseller performance requirements


Performance is a complex, multifaceted notion that considers different understandings of how organizational effectiveness is achieved and measured. In fact, research in this
field suggests four different perspectives on performance
external achievement, stability, internal harmony, and flexibilityeach based on a different theoretic model of organizational effectiveness (Quinn & Rohrbaugh, 1983; Scott,
1998). Each of the four facets represents a separate concern
that all organizations, including resellers, must address to
survive. At any single point in time, depending on economic
conditions, competitors, or other sources of friction, one

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795


Table 2
A channel incentives classification scheme
Credible channel policies
Pledges to the channel
Expansion of approved customer list for resellers, migration to 100%
channel reliance, direct sales reps compensated equally whether they
make a direct sale or support the reseller
Conflict resolution strategies
Resellers compensated for account development efforts if sale is stolen
by channel rival, partner advisory council instituted
Market development support
Sales support information
Customer-care hotline for resellers to call for information, post-support
follow-up to monitor service quality, training seminars, technology
workshops
Market development tools
Promotional materials, sales leads, coop programs, product demo programs,
trade show support, drop-in logos, free yellow pages advertising
Personal assistances
Increase in number of channel managers, empowered channel support
staff, make joint sales calls with resellers
Discretionary funds
Market development funds for resellers to apply to channel program as
they see fit, educational funds for resellers to acquire training outside
normal market support program
Certification programs
Sales lead prioritization for certified resellers, advanced sales, product,
and technical resources, authorized resellers given increased exposure
to end-users
Supplemental contact
Communications programs
Video broadcasts of meetings to resellers, communications program
includes newsletter, fax blasts, e-mail announcements, and channel
broadcasts
Automated information
Single portal access to online incentive, educational, and technical
support, online status report for everything resellers have sold, triggering
earned rewards
Automated transactions
Online configuration tool for pricing, quoting, and configuring orders,
online support vehicle to order spare parts and make warranty claims,
automated program allows resellers to fill out reports online
High-powered incentives
Unique sellable solutions
Sellable service and leasing programs, multivendor service contracts so
reseller can support multiple brands, product line that opens the doors to
consulting opportunities
Immediate incentives to sell
Cash bonuses to resellers that introduce certain services to new customers,
cash rebates pegged to sales growth, resellers earn points redeemable for
cash and prizes
Financial programs
Discounts on smaller deals to improve reseller margins and lower end-user
price, allow resellers to spread out purchases over time
End-user encouragements
Reseller marketing
Nationally market reseller-developed solutions, web site allows end users
to learn about and link directly to resellers, resellers allowed to sponsor
portions of end-user seminars
Comarketing
Works with resellers to create bundled solutions for targeted vertical
markets, works with resellers to stimulate customer demand in new markets

89

Table 2 (continued)
End-user encouragements
Risk reduction programs
Programs that allow customers to kick the tires before committing to
purchase, mentoring programs ensure customer experience is positive
Table adapted from Gilliland (2003).

concern may take precedence. Eventually, however, all four


performance concerns are addressed. Because each concern
represents a different understanding of effectiveness, each
takes a unique perspective on incentive rejection. Importantly, the extent that a channel incentive is compatible is a
function of the extent it is compatible with the resellers
performance concern. Below, each concern is described in
terms of how it is manifested to channel resellers and in
Table 4, the theoretic model of performance from which
each concern is derived is discussed.1
The goal attainment concern refers to the resellers
requirement to achieve recognized measures of success in
order to satisfy external constituents of the firm. This
concern considers high performance to be the achievement
of pre-established objective measures that indicate financial
success. It reflects the resellers need to meet financial
benchmarks as anticipated by external claimants such as
suppliers, shareholders, and other stakeholders. The concern
is magnified following periods of inadequate market performance; poor performance shifts the resellers focus to
improving near-term sales and margins, indicators of productivity and efficiency.
The integration concern refers to the resellers requirement for maintaining stability and coordination in its performance of channel tasks. Stability is desired because a lack
of coordination results in lost opportunities and low levels of
end-use customer satisfaction (Cheng, 1984). Given that
intermediaries commonly represent multiple products and
brands, stable execution of the many marketing tasks is both
difficult to achieve and necessary to maintain effectiveness.
This is more likely to occur when the reseller uses reliable
methods and tools. Thus, it is important that the reseller rely
on established methods for selling, promoting, providing
service, generating and following leads, accessing information, and facilitating customer transactions. Resellers that
experience a low level of coordination in their marketing
systems attempt to restore order by increasing stability.
The pattern maintenance concern refers to the resellers
ability to maintain cooperative, low-conflict relationships
with fellow channel participants, including other resellers,
the supplier, and, if applicable, downstream channel partners. From this perspective, effectiveness is the satisfaction
and confidence of system members. Horizontal and vertical
channel conflicts are largely a function of tension arising
from noncompetitive marketing arrangements, feelings of
1
For a description of how each model of performance specifically
relates to a channel of distribution setting, see Kumar, Stern, and Achrol
(1992).

90

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795


Table 4
Reseller performance concerns and associated models of effectiveness
Performance
concern

Theoretic model of effectiveness

Goal attainment

Rational goal modelconsiders the organization as


a rational, goal-driven entity, logical in both its
selection of goals and its plans to achieve them.
The different components of the organization are
viewed as independent entities, each component
to be managed for increasing efficiency and
productivity in pursuit of the goals (Gouldner, 1959).
Internal process modelconsiders the organization
as a complicated network of interdependent
components. Each one is both complex and
probabilistic. To function effectively, control must be
applied to stabilize and coordinate the interworkings
of the various components (Buckley, 1967).
Human relations modelconsiders the organization
as comprised of individual participants, which
operate as members of social groups. The groups
have loyalties that are stronger than individual
self-interests. Cohesion and morale building are
required for organizational members to reach
their potential and maintain satisfaction
(Cummings, 1977).
Open systems modelconsiders the organization
as engaging in processes such as growth, learning,
and acquisition so it can expand into the future.
Because the organization actively manages its
environment, it requires flexibility and adaptability
to counter environment changes. Performance is
achieved as the resources required to evolve are
attained (Pfeffer & Salancik, 1978).

Integration

Pattern
maintenance

Adaptability

Fig. 1. Overview of process for crafting compatible channel incentives.

stagnation, value drains within the channel, and a lack of


adequate customer demand. The need for harmony is
amplified when an unexpected stress or source of tension
is experienced. If tension is not managed, resellers suffer
from morale loss, question their involvement in the system,
and eventually, their ability to survive.
The adaptability concern considers the resellers capacity
to maintain the flexibility and responsiveness required to
create value in new forms as the demands of the market

Table derived from Kumar et al. (1992) and Quinn and Rohrbaugh (1983).

change. This perspective considers effectiveness to be the


ability to attract the necessary resources to adapt to volatile
environments. As uncertainty and change are experienced or
anticipated, resellers require access to the most recent
technologies, new selling opportunities, and the freedom
to respond to unexpected challenges. Acquiring the resources and ability to adapt allows the reseller to pursue value in
new ways (Narus & Anderson, 1996).

Table 3
Incentive compatibility matrix
Reseller performance
concern

Bases for incentive rejection

Salient incentive
control category

Examples of particularly
appropriate (inappropriate) incentivesa

Goal attainment

Incentive magnitude,
incentive immediacy

Output

Integration

Destabilization

Activity

Pattern maintenance

Equity, inadequate pledge

Capability, pledge

Adaptability

Ability to meet current requirements,


ability to meet future requirements

Pledge, capability

. High-Powered Incentives
. (capability-based Market Development Support;
Supplemental Contact)
. Market Development Support;
Supplemental Contact
. (End-user Encouragements)
. Credible Channel Policies, Supplemental Contact;
capability-based Market Development Support
. (High-Powered Incentives)
. End-User Encouragements;
Credible Channel Policies
. (activity-based Market Development Support)

In this column, capitalized words represent examples of specific incentives from Table 2.

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

To accomplish Step 1, the supplier identifies the resellers primary concern for performance. Resellers that are
doing poor financially are likely to focus on attaining
economic goals, those that suffer from a lack of coordination (the integration concern) may attempt to stabilize their
marketing systems, those that encounter high-channel conflict (the pattern maintenance concern) need to restore
system harmony, and resellers that face technological uncertainty may focus on adaptability.

4. Step 2: Recognizing the bases for incentive rejection


Step 2 involves recognizing how resellers efforts to meet
performance concerns require different forms of support.
That is, because channel incentives come in so many
varieties, any particular incentive may or may not be
compatible with what the reseller is trying to accomplish
at that particular time.
A review of the extant literature suggests seven bases on
which an offered channel incentive may be rejected. The
seven bases are not additive. That is, any single basis may
be grounds for the reseller to determine that the incentive is
compatible with its needs; likewise, any single basis may
provide the reseller with sufficient grounds for rejection.
Resellers concerned with the attainment of economic
goals will evaluate an offered incentive by how it supports
bottom-line performance. In this case, two bases for incentive rejection are salient. These bases are relevant to the
attainment of economic goals because they inform the
reseller of the extent and time frame by which performance
goals may be achieved. Incentive magnitude refers to the
monetary size of the offered incentive (Williamson, 1991).
The greater the potential gain, the greater the incentives
magnitude. Because resellers often compare competitive
offers, the more the incentive magnitude exceeds the
market average, the less likely the reseller is to reject the
incentive. Incentive immediacy refers to how closely
reseller performance of a specified task is linked to monetary compensation (Williamson, 1991; Zenger & Marshall,
2000). Some incentives, like trade discounts, are very
immediate or intense because the dealer receives remuneration as soon as the product is sold. Others, like training
seminars, are less intense because of the delay between
actions taken to earn the incentive (attending the seminar)
and the eventual receipt of monetary benefits. The more
intense the incentive, the more it is able to motivate
specific performance on the part of the reseller. Together,
incentive magnitude and immediacy contribute to an incentives power (Williamson, 1991); that is, an incentive with
high magnitude and immediacy is considered to be a highpowered incentive.
Resellers concerned with system integration are interested in the extent that the incentive supports or detracts
from its ongoing marketing program. In this case, an
incentive might be rejected for reasons of destabilization.

91

Destabilization refers to an incentive that directs the


reseller towards new or unfamiliar tasks that detract from
stable operations. Resellers seeking stability may reject
suppliers attempts to introduce incentives such as higher
margins that misdirect attention from efforts to establish
stability, or incentives that enhance flexibility at the
expense of stability.
Regarding the resellers concern for harmony, as stress
and tensions rise, equity, the extent the incentive is fair,
becomes an important aspect of consideration (Kumar,
Scheer, & Steenkamp, 1995; Ring & Van de Ven, 1994).
A judgment of inequity may occur for several reasons.
First, the incentive may lack distributive justice, that is, it
may not be high enough in magnitude for the effort
required. For instance, a reseller may be offered a very
handsome margin payment to represent a new product line,
but if the reseller is required to perform more tasks than are
usually required to earn that margin (e.g., new market
development or extensive customer service), it may be
seen as inequitable despite its high magnitude. Second,
the incentive may lack procedural justice, that is, the
policies or procedures that are used to distribute payment
may seem unfair. Another basis for rejection considers the
extent the reseller is offered an inadequate pledge. Promises of specific investments or channel-supporting policies
have recently been examined as key signals of a suppliers
intent to bind itself to its channel (Anderson & Weitz,
1992). In turn, these pledges are often met with reciprocal
pledges of commitment and loyalty. On the other hand,
inadequate commitments or policies may be rejected by
resellers concerned about the strength of their social attachments with the supplier or other resellers.
When the reseller focuses on the need for adaptability, it
is concerned about its capacity to maintain the flexibility
and responsiveness required to create value to customers,
even as the demands of the market change (Quinn &
Rohrbaugh, 1983). Concerns center on the ability to adapt
to both existing and future requirements. Ability to meet
current requirements considers short-term adaptability. That
is, if the product solution offered by the supplier does not
meet or cannot be adapted to the current needs of end-use
customers, the reseller will be less likely to aggressively
represent the line. Suppliers must ensure that their product
fits or is customizable to the end user or their offered
incentives are likely to be rejected. Ability to meet future
requirements refers to the extent that the suppliers offered
solution allows the reseller to meet the challenges presented
by new opportunities, new markets, and new technologies.

5. Step 3: Considering the factors that lead to reseller


rejection
Once the relationships between reseller performance
concerns and channel incentives are recognized, the supplier considers how incentive rejection actually occurs. The

92

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

need for performance affects incentive rejection in several


ways.
First, a reseller may reject an offered channel incentive
on the grounds that it does not enhance effectiveness along a
needed performance dimension, as discussed above. For
instance, an incentive that promotes reseller stability may be
rejected if the reseller feels that its systems are sufficiently
stable. In this case, the reseller has little reason to relinquish
control of a channel activity to the supplier (by accepting the
incentive) if the incentive provides little or no marginal gain
in stability.
Second, a reseller may reject an incentive because of its
effect on another performance dimension. In some cases, a
solution to one performance need has an unintended and
negative effect elsewhere. Again, consider an incentive
package that promotes stability. If the reseller is more
concerned about its ability to adapt to uncertain conditions,
the incentive may be rejected because its focus on stability
could reduce the resellers flexibility.
Third, a reseller may reject a previously acceptable
incentive as its needs change over time, from one performance concern to another. For instance, a reseller may
currently be applying an incentive that encourages the
pursuit of economic indicators of performance. However,
as the resellers technological environment becomes more
volatile, it may see adaptability as a more urgent problem.
Thus, the reseller may prefer to shift its incentive structure
to one that encourages expansion into new markets. In this
scenario, the original incentive may be ignored as the
reseller seeks incentives (possibly from other suppliers) that
enhance adaptability.
Fourth, a reseller may reject a previously acceptable
incentive because the incentive creates an unanticipated
need along another performance dimension. Consider a
reseller that addresses its original need to achieve economic

goals by applying an incentive that motivates immediate


sales activities (for instance, a reseller cash rebate program).
A focus on short-term selling activity may come at the
expense of attending ongoing training programs and acquiring important new product knowledge. This may eventually
create a need for harmony as the reseller struggles to
maintain its level of competence.
As the supplier completes Step 3, it should have a strong
idea of the resellers particular performance need, the
resellers salient basis for incentive rejection, and the
dynamic relationship among performance needs and incentive compatibility. In the next step, the supplier designs an
appropriate channel incentive program.

6. Step 4: Designing channel incentives


A key consideration in incentive design is the incentives
control category; that is, the type of reseller response
motivated by the suppliers incentive. The literature has
specified four general control categories, which are
described below. Also, Table 5 provides the theoretic basis
for each category, as well as several examples of each.
Output incentives are intended to control reseller results,
such as sales volume or market share. Rewarding specific
outcomes allows the supplier to set, monitor, and objectively
evaluate clear standards of performance (Jaworski, 1988).
Output incentives are efficient in that little additional
information is required to execute the incentive (Bergen et
al., 1992). For instance, if a supplier desires resellers to sell
more aggressively, it can simply offer a larger margin.
Activity incentives are designed to control reseller behaviors, particularly those that are necessary to successfully
market the product (Challagalla & Shervani, 1997). Because
a common supplier complaint is that the reseller does not

Table 5
Incentive control categories
Control category

Theoretic precedence

Examplesa

Output incentivesreseller reward based on


achieving outcome goals, quantity of production.

Bello and Gilliland (1997),


Jaworski (1988)

Activity incentivesreward based on the


performance of specified channel tasks.

Celly and Frazier (1996),


Ouchi and Maguire (1975)

Capability incentivesreward based on


enhancing the resellers skill level and knowledge.

Challagalla and Shervani


(1996, 1997)

Pledge incentivesreward based on channel


membership, reseller counter-pledges.

Fein and Anderson (1997),


Frazier and Lassar (1996)

High-powered incentives such as margin discounts,


sales bonuses, cash rebates pegged to sales growth,
and favorable financing arrangements such as
leasing programs.
Market development support incentives such as
coop advertising, provision of sales leads,
promotional materials, and product demonstration
programs.
Market development support incentives such as
certification programs and discretionary funds.
Supplemental contact incentives such as
provision of automated information and
automated transaction tools.
Credible channel policies such as a noncompeting
sales force, credible promises to support resellers,
and conflict resolution strategies. End-user
encouragements such as reseller marketing
and comarketing.

All examples drawn from Gilliland (2003).

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

have enough time to adequately represent its product,


effective supplier-provided marketing tools, such as leadgeneration programs, may encourage the reseller to engage
in desired activities.
Capability incentives are similar to activity incentives in
that they also influence reseller behavior. However, the
types of behavior influenced are the resellers efforts to
improve its ability to sell the suppliers product, generally
through the acquisition of knowledge and expertise (Challagalla & Shervani, 1997).
Pledge incentives are intended to control the investments
of time, money, and effort that a reseller makes to a supplier.
They generally consist of the suppliers own pledges or
promises to resellers, which serve as credible signals of
commitment to a more permanent, mutually beneficial
relationship (Anderson & Weitz, 1992).
Creating an attractive incentive arrangement requires
analyzing the resellers performance needs and carefully
matching the bases for incentive rejection under each need
with the salient incentive control category. It is the four
categories of controloutput, activity, capability, and
pledgethat the reseller assesses to determine if an offered
incentive is compatible with its concerns for performance.
Now, each reseller performance need is considered and
theory-based recommendations are provided to help suppliers craft compatible-incentive programs. The reader may
wish to again refer to Table 3 for examples of appropriate
and inappropriate incentives.
6.1. The goal attainment concern
As discussed in Step 2, resellers that stress the attainment
of economic goals will primarily assess an incentive on its
magnitude and immediacy. While most any incentive can be
designed with these two characteristics in mind, they are
typical of output incentives. Specific incentives that apply to
this scenario include increases in the margin allowed,
reseller sales rebates, and spiff programs such as sales
bonuses, gifts, and contests. These incentives are likely to
be accepted because they support the resellers need to
immediately and efficiently increase revenue, adding to
bottom-line performance.
On the other hand, incentives offering low levels of
magnitude and intensity tend to be incompatible with the
goal attainment concern. For instance, many capabilitybased incentives such as training programs, certification
programs, and intensive communication programs encourage the reseller to spend substantial time in an educational
setting, detracting from its short-term selling efforts.
6.2. The integration concern
When system integration is of concern, destabilization is
the most salient basis of incentive rejection. Stability can
be achieved through activity-based incentives that impose
an organizing structure on how the reseller executes

93

channel functions. For instance, cooperative promotional


programs allow the supplier and reseller to carefully
coordinate promotions. Activity incentives support task
coordination and reduce the chances of instability and
confusion. Other incentives such as web-based access to
technical and applications information enhance the flow of
information. When tasks and resources are specified and
provided, coordination occurs and the resellers marketing
activities stabilize.
Stability is not compatible, however, with incentives that
stress innovation such as reseller marketing and comarketing programs. The more innovative the incentive, the more
the reseller is compelled to broaden its scope to meet the
requirements of new markets and new opportunities. A
focus on adaptability may come at the expense of maintaining stable operations.
6.3. The pattern maintenance concern
Harmony is attainable through positive channel attitudes
such as trust and relationship commitment, which emerge
when channel members develop the social dimension of
their relationship (Ring & Van de Ven, 1994). Thus, to
resellers seeking harmony, incentive equity and sufficient
pledges are key determinants of compatibility. Equity and
fair dealing can be attained through incentives that stress
reseller capabilities and pledging. Capability incentives,
such as certification programs, reduce tension because they
give the reseller the confidence to operate in difficult
environments. Incentives that provide discretionary funding
contribute to relationship equity because they demonstrate
supplier trust by giving the reseller control of its own
marketing program. Pledging incentives invite the parties
to bind themselves to one another, reducing tension by
providing a relational safeguard to ward off dissolution of
the relationship (Fein & Anderson, 1997). Incentives such
as conflict resolution strategies are designed to do just that,
resolve conflict and enhance harmony.
On the other hand, the drive for harmony may be
incompatible with output incentives. These tend to control
reseller tasks by emphasizing short-term activities and
measuring sales outcomes. While output incentives may
improve bottom-line performance, they fail to consider the
social dimension of the relationship. This is because they are
based on the suppliers instrumental concerns for economic
achievement, which, by definition, do not consider the
reseller.
6.4. The adaptability concern
In times of rapid environmental change, resellers often
seek adaptability (Narus & Anderson, 1996). To them, the
ability to meet current and future requirements is expected
to be very important. Generally, incentives that promote
new approaches and learning, such as pledging incentives
and capability incentives, are conducive to the pursuit of

94

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

adaptability. Pledging incentives, such as those that demonstrate the suppliers willingness to invest in and continue
to support the indirect selling model, encourage adaptability
because they bind the parties together, providing an additional resource for the reseller as it attempts to negotiate an
uncertain future. Capability incentives promote adaptability
by increasing the resellers overall base of knowledge that
can be applied to unexpected situations.
Activity incentives tend to be incompatible with adaptability because they restrict learning and the acquisition of
knowledge. Instead, activity incentives compel the reseller
to pursue a standardized set of tasks, encouraging conformance instead of flexibility.

7. Implementation: overcoming challenges


The four-step process presented above is generalized to
typical channel relationships. However, no two channel
structures are identical. Each faces unique challenges which
compel additional consideration. This section briefly
addresses several challenges that may be imposed by
diverse channel structures and situations.
7.1. Multiple resellers
Although the channels of distribution literature focuses
on the dyadic nature of individual supplier reseller relationships, in reality, suppliers often enlist hundreds of resellers.
This makes it difficult for a supplier to analyze each
resellers performance concern and craft a customized
incentive program. While a small group of key resellers
can still be focused on, a supplier in this condition should
consider offering a channel program that fits the majority of
resellers needs. This may not be difficult to accomplish
because different players in an industry often encounter
similar concerns. For instance, in the high-technology
distribution channel increasing market saturation has forced
many suppliers to seek out smaller customers traditionally
courted by independent value-added resellers. Thus, many
of these resellers are currently engaged in vertical channel
conflict with suppliers. Incentives that focus on enhancing
harmonious relations might be appropriate for the majority
of these resellers.
7.2. Relational considerations
Some incentives, such as pledges and conflict resolution
strategies, can be implemented by the supplier to promote a
more relational form of exchange with selected resellers
(Kumar, 1996). Suppliers that desire more solid partnerships
should consider offering these particular incentives, even
though the resellers performance concerns suggest other
incentives may be appropriate. This action is encouraged
because of the many advantages available through relational
exchange (Ring & Van de Ven, 1994). Still, the supplier

should be aware of the possible unintended effects that these


incentives might create.
7.3. Evolving reseller needs
As markets, competitors, and environments evolve,
resellers will eventually change their focus from one performance concern to another. This is in keeping with the
universal organizational struggle to achieve adequate levels
of performance along the four different facets. Suppliers
should recognize that when performance concerns change,
they become particularly vulnerable to reseller switching.
That is, if competitors offer superior ways of meeting
resellers new performance concerns, resellers may switch.
Suppliers should keep constant tabs on reseller performance
concerns to ensure that the incentive package remains compatible. Likewise, suppliers should constantly monitor competitive incentive offerings to prevent losing an advantage.

8. Final considerations
One may wonder why the supplier would not simply
offer an incentive package that covers the spectrum of
possible reseller performance concerns. Then, a reseller
could select the incentive that addresses its particular
situation, ignoring others on the menu until its performance
needs change. In fact, recent research implies that suppliers
are expanding the breadth of incentives offered (Gilliland,
2003; Narus & Anderson, 1996). While this may be a
worthwhile strategy in some cases, two important issues
should be considered.
First, managing many different incentives burdens the
supplier, particularly if the incentives promote opposite
behaviors. For instance, if a supplier simultaneously encourages the reseller to focus on short-term selling activities and
the long-term acquisition of expertise, confusion may result.
The supplier should be aware that many incentives, such as
providing personal assistance in the field and comarketing,
require the investment of a good deal of money and effort. It
is unlikely that a supplier could devote adequate resources
towards an incentive package that is overly broad.
A more important consideration may be the incentive
programs potential effect on supplier performance. Because
of the control characteristics inherent in channel incentives,
suppliers can craft incentive packages to address their own
performance concerns. For instance, a supplier concerned
with goal attainment may offer high-powered incentives in
hopes that resellers will immediately pursue short-term
selling activities. If the concern is adaptability, an incentive
can be offered to motivate the reseller to expand into new
markets. Thus, if a full range of incentives is offered to
resellers, it is likely that some would detract from the
suppliers own effort to achieve high performance. Thus,
the incentive package should carefully consider both the
resellers and suppliers performance concerns.

D.I. Gilliland / Industrial Marketing Management 33 (2004) 8795

The four-step process described herein offers a framework for suppliers to craft compatible incentive packages
with independent resellers. By linking an incentives control
characteristics to a resellers performance requirements, the
reseller rejection problem may be diminished.

Acknowledgements
The author would like to thank Steve Kim for his helpful
comments on an earlier version of this manuscript.

References
Anand, P., & Stern, L. W. (1985). A sociopsychological explanation for
why marketing channel members relinquish control. Journal of Marketing Research 22(4), 365 376.
Anderson, E., & Weitz, B. (1992). The use of pledges to build and sustain
commitment in distribution channels. Journal of Marketing Research
29(1), 18 34.
Bello, D. C., & Gilliland, D. I. (1997). The effect of output controls, process
controls, and flexibility on export channel performance. Journal of
Marketing 61(1), 22 38.
Bergen, M., Dutta, S., & Walker Jr., O. C. (1992). Agency relationships in
marketing: A review of the implications and applications of agency and
related theories. Journal of Marketing 56(3), 1 24.
Buckley, W. (1967). Sociology and modern systems theory. Englewood
Cliffs, NJ: Prentice-Hall.
Celly, K. S., & Frazier, G. L. (1996). Outcome-based and behavior-based
coordination efforts in channel relationships. Journal of Marketing Research 33(2), 200 210.
Challagalla, G. N., & Shervani, T. A. (1996). Dimensions and types of
supervisory control: Effects on salesperson performance and satisfaction. Journal of Marketing 60(1), 89 105.
Challagalla, G. N., & Shervani, T. A. (1997). A measurement model of the
dimensions and types of output and behavior control: An empirical test
in a salesforce context. Journal of Business Research 39, 159 172.
Cheng, J. L. C. (1984). Organizational coordination, uncertainty, and performance: An integrative study. Human Relation 37(10), 829 851.
Cummings, L. M. (1977). The emergence of the instrumental organization.
In P. S. Goodman, J. M. Pennings, and Associates (Eds.), New perspectives in organizational effectiveness. San Francisco: Jossey-Bass.

95

Fein, A. J., & Anderson, E. (1997). Patterns of credible commitments:


Territory and brand selectivity in industrial distribution channels. Journal of Marketing 61(2), 19 34.
Frazier, G. L. (1999). Organizing and managing channels of distribution.
Journal of the Academy of Marketing Science 27(2), 226 240.
Frazier, G. L., & Lassar, W. M. (1996). Determinants of distribution intensity. Journal of Marketing 60(4), 39 51.
Gilliland, D. I. (2003). Toward a business-to-business channel incentives
classification scheme. Industrial Marketing Management 32(1), 55 67.
Gouldner, A. W. (1959). Organizational analysis. In R. K. Merton, L.
Broom, & L. S. Cottrell (Eds.), Sociology today. New York: Basic
Books.
Jaworski, B. J. (1988). Toward a theory of marketing control: Environmental context, control types, and consequences. Journal of Marketing
52(3), 23 39.
Kumar, N. (1996). The power of trust in manufacturer retailer relationships. Harvard Business Review 74, 92 106.
Kumar, N., Scheer, L. K., & Steenkamp, J. -B. E. M. (1995). The effects of
perceived interdependence on dealer attitudes. Journal of Marketing
Research 32(3), 348 356.
Kumar, N., Stern, L. W., & Achrol, R. S. (1992). Assessing reseller performance from the perspective of the supplier. Journal of Marketing
Research 29(2), 238 253.
Murry Jr., J. P., & Heide, J. B. (1998). Managing promotion program
participation within manufacturer retailer relationships. Journal of
Marketing 62(1), 58 68.
Narus, J. A., & Anderson, J. C. (1996). Rethinking distribution: Adaptive
channels. Harvard Business Review 74, 112 120.
Ouchi, W. G., & Maguire, M. A. (1975, December). Organizational control:
Two functions. Administrative Science Quarterly 20, 559 569.
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations.
New York: Harper & Row.
Quinn, R. E., & Rohrbaugh, J. (1983). A spatial model of effectiveness
criteria: Towards a competing values approach to organizational analysis. Management Science 29(3), 363 377.
Ring, P. S., & Van de Ven, A. H. (1994). Development process of cooperative interorganizational relationships. Academy of Management Review
19(1), 90 118.
Scott, W. R. (1998). Organizations: Rational, natural, and open systems
(4th ed.). Upper Saddle River, NJ: Prentice-Hall.
Williamson, O. E. (1991, June). Comparative economic organization: The
analysis of discrete structural alternatives. Administrative Science Quarterly 36, 269 296.
Zenger, T. R., & Marshall, C. R. (2000). Determinants of incentive intensity in group-based rewards. Academy of Management Journal 43(2),
149 163.