The Goodtime Equipment Company, Minneapolis, was a medium-sized manufacturer of playground equipment. The company produced an extensive product line and marketed its products nationwide. The field sales force numbered thirty-five persons, who were paid on a salary basis. In addition to the salary plan, Goodtime Equipment Co. had a bonus program for its sales personnel, whereby they could earn extra pay for achieving and surpassing their quotas. Over the past several months, R.J. McNeil, the sales manager, had received two recurring complaints from salespeople dissatisfied with certain elements in the existing bonus program. The staff complained about their bonuses being paid on a once-a-year basis, preferring instead to have the payments spread out over the year. And, although roughly 80 percent of the sales force had received bonuses in the past, some complained about the difficulty in achieving quotas. Specifically, the salespeople felt that their assigned quotas were set too high, keeping them from earning larger bonuses.
McNeil believed that the complaint about the quota limit was probably nothing more than the usual griping from salespersons who thought that their quotas were too high. As a matter of company policy, the sales manager, in collaboration with the branch managers, set the quotas. Even though the sales staff were not consulted about the quota limits, McNeil felt strongly that the quotas were not only generous but also extremely fair. In defense of the fairness, he pointed out that each person’s quota was set individually, based upon conditions unique to the territory. Therefore, he contended that the managers were bending over backwards to accomodate the sales staff.
Regarding the number of bonus payments to the salespeople, McNeil agreed that they had a legitimate complaint. Consequently, he carefully studied the situation, in consultation with his branch managers, and came up with what he believed to be an equitable solution. He prepared the following communication, designed to announce the new bonus program to the sales force.
1. PROPOSAL FOR NEW QUOTA-BONUS PROGRAM
It has been determined that our present bonus program is unsatisfactory. The new bonus program outlined below will take effect in time for the next fiscal year and will provide three major changes:
- It will enable sales personnel to receive a bonus each quarter instead of yearly.
- It will provide an extra incentive to exceed 100 percent of quota.
- It will increase the payoff amount by $10 in each category.
To show the difference in the programs, the old program should be explained first.
Under the old program, each salesperson would receive a bonus at the end of each year if he or she exceeded 80 percent of yearly quota. The payoff was
- 80-100% of quota = $30 per percentage point.
- 101-110% of quota = $40 per percentage point.
- 111-120% of quota = $50 per percentage point.
- 121% and over of quota = $60 per percentage point.
- 95% of quota = 15 x $30, or $450.
- 105% of quota = 20 x $30 = $600 + 5 x $40 = $200, or $800.
- 115% of quota = 20 x $30 = $600 + 10 x $40 = $400 + 5 x $50 = $250, for a total of $1,250.
The new bonus program will have a payoff of
- 80-100% = $40.00 per percentage point.
- 101-110% = $50.00 per percentage point.
- 111-120% = $60.00 per percentage point.
- 121-over% = $70.00 per percentage point.
In addition to the higher rate of payoff, the bonus will be paid on a quarterly basis. This will be done on a quarterly averaging basis. An example of how this works is as follows.
$3,720.00 yearly bonus f 4 = $930.00 per quarter. $930.00 bonus paid for first quarter.
114% of quota: to determine average rate, we add 146% +114% = 260% f 2 = 130% for two-quarter average.
$2,600.00 yearly bonus f 4 = $650 per quarter
$650 x two quarters = bonus due for first two quarters = $1,300. Since payment of $930.00 was made in first quarter, we owe’$1,300.00 – $930.00, or $370.00 in second quarter. $370.00 bonus paid in second quarter.
143% of quota: to determine average rate, we add 146% + 114% + 143% = 403% f 3 = 134% average for three quarters.
$2,880.00 yearly bonus f 4 = $720.00 per quarter. $720.00 x three quarters = $2,160.00
$2,160.00 – $1,300.00 paid = $860.00 $860.00 bonus paid in third quarter.
138% of quota: to determine four-quarter average, we add 146% + 114% + 143% + 138% = 541% f 4 = 135%. The yearly average is the same as it would have been under the old system.
$2,950.00 is the yearly bonus. Fourth-quarter payment is $2,950.00 minus previous payments of $2,160.00, or $790.00. Fourth-quarter bonus is $790.00
As an additional incentive, we are making an extra bonus available to those who exceed 100 percent of their quota. The payoff for this extra bonus will be
This $550.00 will be paid in addition to the $2,950.00, for a grand total of $3,500.00 This shows an increase of $1,100.00 over the previous bonus program. It is roughly estimated that this new program will cost an additional $40.00 per $100.00 spent under the old system. Bonus payoffs under the new program are as follows:
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.