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Case 4: Mead Envelope Company—Is a New Compensation Plan Needed?
Questions at the End of Case
Question 1: Why is a new compensation plan needed at Mead, and what
are the positive outcomes of a successful sales compensation
plan?
Three Reasons You Need New Sales Compensation Plans
1. A sound compensation plan will help achieve marketing strategies and
sales objectives.
2. A sound compensation plan will attract and retain people with the right
skills and competencies to perform e.ectively.
magazines and by networking with one another at conferences and conventions,
salespeople today are more familiar with compensation levels and practices than in
designed.
3. A sound compensation plan will control the cost of sales.
Compensation is frequently the most significant cost of maintaining a sales
organization. Depending on the industry, direct compensation--salary plus variable
pay (commission or bonus or both)--can range from 2 to 20 percent of sales. Today,
many companies are concerned with customer profitability: the mix of products they
One of the most effective ways you can increase sales profitability is through the
compensation plan. The plan's principal objective is to direct salespeople to sell to
Five Positive Outcomes of a Successful Sales Compensation Plan
Sales compensation is one of the most powerful tools available to management to
achieve business results. The incentive component (commission or bonus)
Management, on the other hand, typically judges the sales compensation
plan's success on multiple criteria. In companies where sales compensation plays a
Growth
The desire to grow—by creating new markets, winning new customers, and
continually improving processes to retain current customers—is a top priority at
many companies. The Alexander Group's 1997 Survey of Executive Confidence in
Sales Growth reported that 64 percent of the respondents expected to achieve sales
growth of 15 percent or more. Their in-depth investigation into how companies
of the variable compensation (80-90 percent) on reaching volume objectives tied to
last year's sales: Mead's problem.
profit
Increasingly, companies want salespeople to focus on profitable business.
The availability of meaningful information about purchase transactions at the
account level, and the intense pressure in many industries on operating profit
Sales Talent--Attract and Retain
In most companies, top management looks to the compensation plan to help
attract and retain the caliber of people it needs to successfully sell to and interact
with customers. A strong sales force is a major competitive advantage, especially in
high contentious markets—markets characterized by high product parity or markets
in which all the major players offer virtually equally high levels of product quality
retaining talented salespeople. Thus, a question to ask about a current plan is—
Does it help the company hire and keep the right salespeople?
Sales Productivity
Today, most companies view their customers as "assets" of the business.
Thus, investments in salespeople, who regularly interact with customers, are
regularly reviewed for improvement. In the late 1990's, a sales job well done in a
given industry produced $1-$1.5 million in revenues. To justify that salesperson
Moreover, the productivity issue is dynamic. Today, the entry-level
salesperson may have to produce $700,000 in sales while a senior salesperson may
have to produce $2.5 million, but those numbers are not fixed. Each year they must
Question 2: What are the reasons that compensation plans fail?
Five Reasons Sales Compensation Plans Fail
Experience shows that as the sales organization grows revenues and profits, the
management challenges also grow. The Alexander Group has conducted
considerable research involving many industries to identify the challenges
management faces in sustaining productive, high-performing sales organizations.
1. The sales compensation plan does not support the company's business
objectives.
In a recent study of human resources professionals, 81 percent of the
respondents reported that their company experienced some form of restructuring
compensation. Why then is this the number one reason that sales compensation
plans fail?
The experience of the Alexander Group suggests that this failure results from
a separation in business accountabilities. Typically, the people who write the
product lines. The company rewards the sales force, however, for selling volume.
The company has no explicit product mix objectives. And, equally important, the
company does
not reward the customer service representatives at all for their efforts should they
it takes a year or more to design and implement a new sales compensation plan
that is in sync with the objectives. This appears to be the case at Mead.
2. The sales compensation plan does not reflect the realities of how jobs
operate within the sales and customer relationship management
processes.
the high-value selling activities the compensation plan should direct, motivate, and
reward.
sales jobs or, at the very least, specialization within the account executive job. How
Jones decides to segment, target, and assign customers—by size, by application, or
representatives with account executives. For example, he could assign three
account executives to one customer service representative, and each account
arrangement.
3. It does not attract and retain the people required for sales success.
A well-designed sales compensation plan is a powerful communicator of what
the right balance between rewarding salespeople for retaining and expanding
business with current customers and motivating and rewarding the same
new business. When this happens over time, a salesperson's selling skills—
particularly those needed to sell new accounts—actually atrophy; the salesperson
4. It does not link the right measures of sales performance to incentive
compensation payment.
measurement. When we discover plan failure based on performance measurement,
some combination of the above.
5. It causes the cost of sales to increase over an extended period of time.
Today in most industries, top management wants sales executives to
maintain or reduce the current level of selling expense. Often, management takes
this stance because the firm has cut prices and, in turn, profit margins to gain
way to engage with customers. We have found that the second course is almost
always possible.
Can You Fix a Failed Sales Compensation Plan?
In a word, no! Putting a fix on a current and failing plan will not, by itself,
restore sales success. In most cases the sales compensation plan has not caused
Take a commission plan, where the company pays a percentage of sales as a
commission and pays it from the first dollar the salesperson brings in each year.
Management comes to realize that this is not really a first-dollar commission plan.
Not all the customers quit buying each year; the salespeople don't have to start
fresh. In fact, the company is paying the salespeople an amount disproportionate to
That was the idea at Mead: the prior year's sales established the performance
standard. The salespeople needed only to beat last year's gross sales figure to start
earning their commission. The problem is that there is no relationship between the
Compensation Program
LEARNING OBJECTIVES
MSG produces and markets a wide variety of hunting and fishing accessories to
approximately 6000 small and medium size retail stores in the Northeast and North
Central regions of the United States. Over the past three years, the annual sales
MSG currently employs 11 sales representatives who receive commissions of
5-7%, depending on the level of sales achieved. Additional compensation may be
received through 2 sales contests. Five salespersons at MSG have guaranteed
proposals revising the current compensation plan.
Specific case objectives are to:
1. Develop a compensation plan that should motivate the sales force to seek
and retain a capable sales force.
as training, account coverage, motivation and evaluation.
3. Emphasize the part the sales force plays in assisting the organization to reach
its objectives.
QUESTIONS AT END OF CASE
salespeople? Why?
PRIMARY DECISIONS
1. What commission rates to utilize.
2. Whether to include salary in the compensation plan.
SECONDARY DECISIONS
1. At what level of sales volume to set the quota.
Assumptions Which Might Be Made
1. That significantly higher compensation levels are needed to recruit and retain
quality sales personnel.
2. That sales potential is currently much higher than the current sales volume.
Alternatives
1. Retain the current compensation plan.
Analysis of Alternatives
Neither the current compensation, nor the plans proposed by the production
manager, the consultant, and the comptroller offer suGcient means for the
salesperson to receive the compensation level of $45,000.00 deemed desirable by
Present Customers
The firm's sales efforts were being directed largely toward the small retailers of
sporting goods located outside the large metropolitan areas. This is reDected by the
annual sales volume per account. The instructor may ask the students to recommend
actions that could be taken to expand sales to the larger retailers of hunting and
Sales Training
The training the salespeople received prior to being assigned a territory
consisted essentially of memorizing the names, prices, sizes and colors, and the
"primary selling features" of the company's products. It is questionable if such
training adequately prepared the salespeople for the task of persuading retailers to
too much time with accounts located close to their homes and with retailers who well
only a small volume of hunting and fishing supplies.
Market Potential
Explicit estimates have not been made of the market potential for hunting and
sales territories.
Why Is Motivation A Problem?
A review of the salespeople's ages, years of service, and sales may suggest to
some students that several of the salespeople have little or no potential for becoming
high volume producers. The more perceptive students may question if any change in
appreciably.
Incentive Plans
The Annual Sales Increase Awards Incentive Plan enables five of the eleven
salespeople, or 45 percent of the sales force, to receive prize money. Salespeople who
produce a very small increase in sales volume can win an award, for example, Mr.
hunting and fishing equipment.
Under the Weekly Sales Increase Award Plan, the monetary award per week is
the same regardless of the actual dollar increase in sales. A very small increase in
volume results in the same award as a very large increase in sales. Therefore, the
increase sales volume. A
salesperson producing $225,000.00 in annual volume may think he has little chance
of pushing his sales above the $432,000.00 level to earn commissions in excess of his
draw. The plan does not provide an incentive to those salespeople who are earning in
The Comptroller's Plan
The comptroller's plan would give some of the salespeople essentially a salary
of $225 per week plus a commission. The weekly incomes of the salespeople on such
a plan could vary widely as a result of Ductuations in their sales.
The comptroller's proposal does not specify how long a salesperson would
per week plus commission. For example, a salesperson who did not receive the
guarantee would have to produce $572,175.00 in sales to annually earn as much as a
salesperson receiving the guarantee whose volume was $405,000.00 for the year.
The Production Manager's Plan
for calling on prospects. Indirectly, the additional time may result in an increase in
sales volume. However, an increase in per diem is not a direct incentive to increase
sales volume. However, an increase would compensate a salesperson for being in the
field regardless of the volume he produced. Better coverage of the territories may
The Consultant's Plan
The Ten Percent Self-Improvement Plan proposed by the consultant is based on
two implicit assumptions: 1) all the salespeople have the ability to increase their sales
volumes; and 2) the sales produced by each of the salespeople are not approaching
the market potential limits of the territory. The bonus commissions, computed on total
the year.
The bonus commission may be a strong incentive for the salespeople to
appreciably increase their sales volumes since the amount of the bonus is in direct
proportion to the absolute dollar increase in sales. To earn bonus commissions each
salesperson would compete against himself and McDonald's competitors rather than
smaller accounts and to devote more attention to the discounters and other large
volume accounts in their territories.
Since the over-ride commission would be paid on a monthly basis, conceivably
a salesperson could earn bonus commissions without increasing his total volume for
decrease in his sales.
The students may wish to recommend modifications to the compensation plans
mentioned or propose alternative methods of compensating and motivating the
salespeople.
COMPARISON OF INCENTIVE PAYMENTS IN CURRENT YEAR WITH BONUS
COMMISSIONS UNDER THE CONSULTANT'S PLAN
TABLE 1
SALES VOLUME INCENTIVE PAYMENTS
Under Existing Plans
Previous Current Dollar Consultant's Plan
Salesmen Year Year Increase Annual Weekly Total
Allen $185,774 $185,184 --- --- $1,138.50 $1,138.50 ---
Campbell 670,608 776,385 105,777 $3,375 2,524.50 5,899.50
$10,579.50
Duvall --- 233,244 --- --- --- --- ---
$27,229.50
TABLE 2
FEBRUARY AND MARCH BY SALESPERSON A
Last This Bonus
Year Year Commissions
February $45,000 $54,000 $900
