The Kroeger Company was a manufacturer of glass-lined steel tanks and alloy steel equipment sold directly to the industrial market. The chief consuming companies were engaged in brewing, distilling, and chemical manufacture. Sales in the United States and Canada were obtained through a fifteen-person sales force working out of the home office in Milwaukee, Wisconsin. Foreign markets were not contacted by the American firm, but manufacturing subsidiaries in West Germany and Japan made sales throughout the rest of the world. Sales amounted to approximately $44 million, three-fourths accounted for by the parent company. All domestic sales personnel reported directly to the general sales manager, who was also vice-president of sales and advertising.
Sales personnel, who were graduate mechanical or chemical engineers, were given a year’s training at the factory and home office before they were assigned to a territory. During training they received a salary of $2,000 per month; as soon as they reached their assigned territories, compensation was on a straight-commission basis. The annual earnings of the salespeople normally ranged from $27,000 to $60,000. Company sales, however, varied greatly from year to year, since demand was influenced significantly by the demand for products manufactured by Kroeger customers. Only a few low-priced items, such as replacement parts, were manufactured for inventory. Most Kroeger products, were custom built to the user’s specifications. Consequently, the earnings of salespeople were subject to wide fluctuations. With a downturn in business, sales force morale slumped, and newer salespeople left the company for greater stability elsewhere.
The high sales force turnover rate resulted in high training expenses during periods of increasing demand. At the same time, when sales were booming, other employees complained about the inflated pay that sales personnel were receiving. After several months’ study of the problem, the general sales manager sent draft copies of a proposed sale compensation plan to the sales personnel. He requested that they read and digest it thoroughly and submit their comments and suggestions to the home office. The plan is summarized below:
Because of the gross inequities that have existed in our sales compensation plan in the past, and to eliminate the periods of hardship that many of you have experienced, we are proposing that each salesperson be given a base salary. This is to be roughly 60 to 70 percent of total take-home pay, with commissions making up the remainder. Since commission payments will make up only about one-third of the total compensation, you will enjoy much greater security than in the past. We will attempt, with the assistance of the marketing research department, to establish potentials for our various sales territories by analysis of published data on the industries we serve, modified by our own experience, which is determined from averages of prior years’ sales. Through the medium of the relation between the base salary and the base sales credit (sales necessary to reach the base salary), we will try to equalize territorial potential and incorporate other elements, such as seniority. Above this base sales credit, 3 percent commission will be paid on the first $50,000; 1.5 percent on the next $50,000; 1 percent on the next $100,000; 0.5 on the next $100,000. The commission scales rise to 0.75 percent on the next $100,000; 1 percent on the next $100,000; it drops to 0.5 percent on the next $300,000; and finally is 0.25 percent on all sales over this amount.
The proposed plan is based on sales credits rather than actual dollar sales. Full credit equal to the dollar sales will be given on an order that is sold and shipped into the area of the salesperson writing the order.
If an order is sold by one salesperson and shipped to another salesperson’s territory, each will receive half credit. This is because we feel that it is important to have the salesperson contact the plant where our equipment is being installed to make certain that it is handled properly and given good service after the installation. To offset partially the effect of “windfall” orders, and to even out the compensation, credits will be scaled down on large orders. Full credit will be given on the first $100,000, 50 percent credit on the next $50,000, and 10 percent credit thereafter. Commissions will be paid on the basis of orders received rather than on shipments made. Our manufacturing cycle normally involves a period of three to six months, and we feel that it is important that you receive your compensation at the time of the sale—not later, when you may have forgotten that you booked the order. Cancellations of orders for any reason, therefore, will be charged back to the salesperson involved and shown as an adjustment on the next commission payment. Each salesperson will receive credit on the above basis for all sales made in his or her territory. It is our intention, if this plan is adopted, to eliminate all house accounts. The total volume of business coming out of each territory will be taken into consideration in planning the take-home pay of the salesperson. Sales credits will be established by the sales correspondent at the time of entering an order. These data will then be entered on the regular IBM order card so that the accounting department can run off quarterly reports. You will know exactly what you are receiving and where it comes from.
As in the past, we will continue to pay all legitimate traveling expenses in accordance with standard procedures.
- Should the proposed sales compensation plan have been adopted?
- Appraise the plan from the standpoint of the Individual salesperson.
- What part should timing have played in the introduction of the new plan, assuming that the sales personnel approve it?
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.