Compensation Structure in the Chinese Travel Services Industry: Problems and Solutions

EXTENDED ABSTRACT - The Chinese travel services industry provides an interesting application of agency theory. From the perspective of travel service company (TSC) owners and managers, continued revenue is paramount and a long-term perspective toward ongoing relationships with customers is highly valued. But for tour guides employed by TSCs, the opposite incentives are in place. Rather than long-term relationship formation with tourists who may provide a continued revenue stream to the company, the tour guide incentives provide incentives geared toward short-term rewards. This is the paradox we address. By understanding these opposing incentives, TSCs can redesign incentive structures that may better align the incentives provided to tour guides with those of TSC owners and managers.



Citation:

Scott B. Droege, Lily Chunlian Dong, and Nancy B. Johnson (2002) ,"Compensation Structure in the Chinese Travel Services Industry: Problems and Solutions", in AP - Asia Pacific Advances in Consumer Research Volume 5, eds. Ramizwick and Tu Ping, Valdosta, GA : Association for Consumer Research, Pages: 245.

Asia Pacific Advances in Consumer Research Volume 5, 2002      Page 245

COMPENSATION STRUCTURE IN THE CHINESE TRAVEL SERVICES INDUSTRY: PROBLEMS AND SOLUTIONS

Scott B. Droege, University of Kentucky, U.S.A.

Lily Chunlian Dong, University of Kentucky, U.S.A.

Nancy B. Johnson, University of Kentucky, U.S.A.

EXTENDED ABSTRACT -

The Chinese travel services industry provides an interesting application of agency theory. From the perspective of travel service company (TSC) owners and managers, continued revenue is paramount and a long-term perspective toward ongoing relationships with customers is highly valued. But for tour guides employed by TSCs, the opposite incentives are in place. Rather than long-term relationship formation with tourists who may provide a continued revenue stream to the company, the tour guide incentives provide incentives geared toward short-term rewards. This is the paradox we address. By understanding these opposing incentives, TSCs can redesign incentive structures that may better align the incentives provided to tour guides with those of TSC owners and managers.

Compensation structures in the tourism industry provide pay for short-term actions on the part of the tour guides, but as representatives of the TSC, the long-term viability of the company, to a large extent, is in the hands of these same tour guides who are compensated for behaviors geared toward immediate rather than future gain. Agency theory makes predictions regarding these relationships. By contrasting the advantages and disadvantages of outcome-based versus behavior-based incentives, agency theory offers some explanation of why individuals behave in ways that may harm the ongoing interests of the company for which they work. It is within this framework that we offer propositions that, if implemented, may increase tour guide behaviors that promote long-term company gains.

Specifically, we make several suggestions concerning tour guide compensation. First, outcome-based contracts for tour guides minimize the labor expense of the travel service company. Second, outcome-based contracts are negatively related to TSC revenues generated by repeat business and referrals. We argue that this is due to the nature of the short-term incentives generated by outcome-based rewards. Third, behavior-based contracts for tour guides maximize the labor expense of the TSC, but are positively related to TSC revenues generated by repeat business and referrals. This creates the paradoxCwhile outcome-based contracts minimize labor costs, they do so at the expense of TSC revenue garnered from repeat business and referrals. We suggest that a possible solution to this dilemma is a mixed outcome- and behavior-based compensation structure. While we posit increases in labor expenses, we suggest that these increased costs are not only offset, but diminished in importance when compared to the increased revenue generated by repeat business and referrals.

Thus the optimal compensation mix consists of several counterbalancing sources. By combining outcome-based and behavior-based components of the tour guide compensation contract, the TSC increases its labor costs. But this is offset by increases in reputation, repeat business from satisfied customers, and customer referrals. TSC owners and managers should carefully consider the incentives that current compensation practices provide.

Agency theory assumes self-interest on the part of both principals and agents. For the TSC, low labor costs are in its best interest from a short-term perspective. But this must be balanced against the self-interest of tour guides’ desire to maximize their income. Current compensation practices have created goal divergence that could, over the long-term, hurt the TSC through decreases in reputation, repeat business, and customer referrals. By using a blended compensation contract, goal congruence between the company and the guide is possible. Mixing elements of outcome-based and behavior-based contracts would increase the company’s cost, but those additional costs would be offset, and perhaps surpassed, by additional revenue. A blended compensation mix would use the income maximization self-interest of the tour guide to complement the goals of the TSC.

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Authors

Scott B. Droege, University of Kentucky, U.S.A.
Lily Chunlian Dong, University of Kentucky, U.S.A.
Nancy B. Johnson, University of Kentucky, U.S.A.



Volume

AP - Asia Pacific Advances in Consumer Research Volume 5 | 2002



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