Do Better-than-Fair Rewards Pay Off? An Examination of Distributors' Responses to Favorably Unfair Rewards

Description

In today’s hypercompetitive market, firms know that they must better motivate their distributors, especially in emerging countries, such as China, with complex distribution channels. However, firms that tend to leverage rewards to galvanize their distributors often face the quandary of what constitutes a truly motivating reward. For example, suppose you are a manufacturer considering a reward for a distributor that just met its performance target as prespecified in the contract. You can deliver the 10% rebate as a reward specified in the contract or, alternatively, offer a better-than-contract 15% rebate. Which reward rate will be more motivating for the distributor? The fair one as specified in the contract or the favorably (albeit unfair) larger one?Conventional wisdom dictates that the larger the reward, the more the distributor will be motivated, regardless of whether the reward exceeds the fair level (i.e., according to the contract). Firms in many industries use rewards far beyond their fair level to gain distributors’ compliance (Beijing Business Today 2012). However, a large body of fairness research suggests that unfairness, even in a favorable manner, can “poison” the relationship between a firm and its distributor (Samaha, Palmatier, and Dant 2011).Although research indicates both pros and cons in doling out favorable but unfair rewards to firms’ distributors, few studies have provided details on the underlying mechanisms for distributor reactions. To fill this gap in the marketing channel governance literature, this research aims to investigate the effects of firms’ favorably unfair rewards on distributors. We propose differential effects on distributors’ performance and trust by delineating the distinct mechanisms involved. Favorably unfair rewards can boost short-term performance to a larger extent than fair ones because of the pleasant surprise and guilt triggered, but such rewards may impair long-term trust because of suspicions of manufacturer goodwill. In addition, we attempt to examine the moderating role of procedure fairness, another important aspect of fairness, on these effects. By adding this dimension, we provide a more complete picture of distributor responses to a favorably unfair reward.To test our study hypotheses, we undertake a series of field experiments. The findings will not only contribute to an in-depth understanding of fairness perspectives in channel relationships but also provide important implications for firms in designing effective reward systems.