Why sales quotas push the steepest discounts into the final days of the quarter

The mechanics behind the deadline

Paul Oyer's 1998 paper in the Quarterly Journal of Economics, "Fiscal Year Ends and Non-Linear Incentive Contracts: The Effect on Business Seasonality," starts from a simple observation: salesperson and executive pay often depends nonlinearly on firm revenue, not proportionally. A rep who reaches 100 percent of quota might see the commission rate on every dollar after that point jump sharply.

That structure gives a seller a direct incentive to manipulate price, timing and effort across the fiscal year. A deal that closes on day 89 of a 90-day quarter is worth more to the rep than the same deal closing on day 91, even if the customer, the product and the price are identical. The fastest way to move a deal from day 91 to day 89 is usually to cut the price. The SEC later used a specific term for the same behavior in a corporate setting: a "pull-in," a sale moved out of a future quarter into the current one through added incentives.

What shows up in the sales data

Oyer tested this against manufacturing firms' actual sales records and found a seasonal pattern that the ordinary business cycle doesn't explain. Sales were, in the paper's own words, "higher at the end of the fiscal year, and lower at the beginning," than in the middle of the year.

The paper also reports price movements around fiscal year-end that are consistent with sellers adjusting prices to pull revenue into the current period rather than the next one. Oyer found the size of the effect varied by industry. The paper does not report one economy-wide percentage for how much prices move; its evidence is directional, drawn from patterns across many firms rather than a single average figure.

The hockey stick, modeled

A separate paper, published in 2010 in Naval Research Logistics by Milind Sohoni, Achal Bassamboo, Sunil Chopra, Usha Mohan and Nuri Sendil, built a formal model of the same behavior inside a single dealer-manufacturer relationship. In their setup, a manufacturer sets a sales threshold for a dealer to hit over a fixed period, with a bonus attached. Dealers facing that threshold put in "a large effort toward the end of the incentive period" to cross it and collect the bonus, producing a spike in sales in the final period of the cycle, what the authors call the hockey stick phenomenon.

The size of that spike depends on two things in the model: how the manufacturer sets the incentive's parameters, and how much uncertainty the dealer faces about demand. The authors also characterize the variance of total sales across every period in the cycle and identify the conditions under which that variance can be reduced. Their proposed fix is to tie the threshold to a market signal correlated with actual demand, rather than a fixed number set in advance; doing so, they find, regulates the size of the end-period spike.

The disclosure rule that turns the pattern into a legal problem

The incentive to discount near a deadline is not illegal by itself. It becomes a securities problem under a specific rule: Item 303 of SEC Regulation S-K, which requires a public company to disclose known trends that are reasonably likely to have a material effect on its revenues or financial condition, even if those trends haven't yet shown up in the reported numbers. The idea behind the rule is that investors should know what management already knows internally.

The SEC's authority to act on a violation of that kind comes from Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, both of which let the agency issue a cease-and-desist order without going to court. That combination, a known internal trend plus a public filing that omits it, is what turns a sales-incentive pattern into an enforcement case rather than just an internal business practice.

A deal that closes on day 89 of a 90-day quarter is worth more to the rep than the same deal closing on day 91, even if the customer, the product and the price are identical.

What happened inside HP

The SEC applied that rule to HP Inc. in a September 30, 2020 press release titled "SEC Charges HP Inc. With Disclosure Violations and Control Failures," announcing a cease-and-desist order against the company. Between November 2015 and June 2016, the SEC found, regional managers used a variety of incentives to pull sales of printing supplies forward from later quarters into the current one. In one region, managers sold supplies at substantial discounts to resellers who then sold the products outside their assigned territories, which violated both HP policy and its distributor agreements.

The order's own language describes the core violation: HP's 2015 Form 10-K failed to disclose a "known trend of increased quarter-end discounting leading to margin erosion and an increase in channel inventory." HP's quarterly disclosures about channel inventory, given on earnings calls, covered only the partners it sold to directly, leaving out inventory sitting further down the distribution chain. Investigators also found that HP's disclosure process "lacked sufficient interaction with operational personnel," meaning information regional managers had about their own sales practices did not reliably reach the people drafting the company's public filings.

When HP later changed its go-to-market model and worked down that inventory, net revenue fell by about $450 million in the third and fourth quarters of 2016. HP agreed to pay a $6 million civil penalty and consented to a cease-and-desist order, without admitting or denying the SEC's findings.

What it means for how a quota gets built

The HP case and the two academic papers describe the same underlying lever from three different angles: a theory of why nonlinear pay distorts timing, aggregate data showing that distortion across manufacturing firms, and a specific company where the distortion went undisclosed and cost $6 million to settle.

The fix that Sohoni and his co-authors identify in their model, tying a threshold to a signal correlated with real market demand instead of a fixed calendar reset, is also the one that would have reduced the incentive HP's own regional managers acted on. A quota that resets to zero every 90 days, with a sharp payout jump at the finish line, rewards a seller for moving the calendar date on a sale rather than for creating new demand. A quota tied to a trailing signal of real demand gives less reason to do that.

Item 303 adds a second layer that applies beyond any one company's pay design. If a sales organization's incentive structure produces a known, recurring pattern of quarter-end discounting, that pattern itself is information a public company's own disclosure rules may require it to report, separately from whatever revenue number the pattern ultimately produces.