Store Manager Incentive Design and Retail Performance: An Exploratory Investigation

Store managers perform multiple tasks within a store, and the way in which they are evaluated and rewarded for these tasks affects their behavior. Using empirical data from multiple stores of a consumer electronics retailer, Tweeter Home Entertainment Group, we highlight the extent to which store manager incentive design impacts store manager behavior and, consequently, retail performance. More specifically, we describe the shift in store manager behavior resulting from a change in incentives, which, in part, altered the importance of sales relative to inventory shrinkage in the store manager compensation plan. Store managers, following this change, directed less attention to the prevention of inventory shrinkage and more toward sales-generating activities and made different process choices within the store. We observed increases in the level of inventory shrinkage and sales within these stores. Controlling for alternative drivers of sales and inventory shrinkage, we find this change in incentive design to be associated with a profit improvement of 4.2% of sales. This work indicates that altering how store managers are compensated impacts retail performance. Moreover, our findings underscore the importance of balancing the rewards given for different types of activities in contexts where agents face multiple competing tasks.