Rex Davis, president of Midwestern Westbrook Elevator Company, told his sales manager, Jim Joines, he was disappointed in the lack of growth of sales in recent years. Sales had leveled off at slightly more than $50 million, even though the elevator industry had received a considerable boost from the enforcement of federal requirements for handicapped access in all buildings serving the public. He believed that, although the sales personnel were experienced and well trained, they were not very strongly motivated to greater effort.
1. PRODUCT LINE AND PROMOTION
The industry made three main types of elevators: hydraulic, geared traction, and gearless traction. Hydraulic elevators were suitable only for buildings less than five stories high, and they were the most economical for these small buildings. Geared traction elevators were most commonly used in buildings between five and forty stories high. Buildings over forty stories high required gearless traction elevators which were considerably more complex and expensive than the other types. The large elevator manufacturers, such as Westinghouse, specialized in gearless traction elevators, preferring to subcontract the manufacture of smaller systems to companies like Midwestern.
Midwestern had positioned itself as a custom designer of geared traction elevators and manufacturer with a good service and repair operation. The company was not lacking competition in this position. There were numerous other geared manufacturers.
Midwestern differentiated itself by emphasizing its own patented design advantages, such as better speed control than other hydraulic and geared manufacturers. However, no company had established a solid position of product superiority. Competitors pushed their own design advantages.
The company’s product line included elevator power units for passenger and freight, control valves, hydraulic jacks, controllers, sling and platforms, freight cars, freight doors, gates, spring buffers, swivel guide shoes, rigid guide shoes, rail brackets, mufflers, deflector sheaves, traction and drum machines, safeties, governors and tension weights, selectors, operating and signal fixtures, hydraulic freight elevators, hospital and passenger hydraulic elevators, traction freight elevators, traction passenger elevators, and traction hospital elevators.
Research and development had been brought nearly to a standstill two years ago when the chief company design engineer resigned. The company, wanting a highly experienced person to take his place, had only recently filled the position with an engineering graduate of Carnegie Mellon, who had worked seven years for Otis.
Promotion by sales personnel primarily involved “wining and dining” large contractors. Maintaining good relations sometimes helped sales personnel obtain valuable information on potential new jobs, and would occasionally permit submissions of second bids when the first was too high. Other promotion took the form of trade ads in Elevator Magazine. Rex and Jim were not sure how effective these ads were, but they believed that since the cost was low, the expense did not matter much.
Approximately half of Midwestern’s sales came from bids on construction contracts. The other half came from direct orders of systems and parts. Contract sales were bid and expedited by five contract sales personnel located in the major trading areas in Illinois, Michigan, and Indiana, while direct orders were handled through Jim Joines’s office in Chicago. The company also maintained eight regional offices to handle maintenance and service of Midwestern equipment. Each regional office had a trained ser- viceperson who maintained and serviced Midwestern’s customers, and estimated and did repair work on existing elevators. For business emanating from outside this general trading area, Midwestern maintained authorized dealers and service representatives who were responsible for the sale and service of Midwestern’s parts in those areas.
For example, all sales and service in Ohio was conducted by Toledo Elevator Company. Being independent, Toledo Elevator was an authorized dealer and distributor of Midwestern’s parts. Authorized dealers were also allowed to carry and service equipment for elevator manufacturers such as Westinghouse.
Midwestern had no formal organizational structure. People in the various departments communicated with one another on an “as needed” basis.
Bidding on elevator construction contracts required skill on the part of sales personnel. Sales personnel spent much of their time trying to “win over” the construction contractors and building owners to “obligate” them to invite the particular salesperson to bid on upcoming contracts. If invited to bid, the salesperson would study the building plans, visit the site to determine the job requirements, and submit a bid proposal to the contractor. If the bid was accepted, the salesperson was responsible for coordinating the construction, ordering the required materials, and subcontracting construction of the elevator shaft.
Management had set a basic guideline of a 10-15 percent profit margin for each new contract. (Average profit on direct orders was 25 percent.) However, jobs were often “low-balled” if Midwestern needed additional business to utilize slack production capacity. Low bids were justified on the basis that future maintenance contracts and service would provide sufficient profit.
Midwestern generally hired only experienced sales personnel who had some background in the elevator or construction industries. Occasionally, however, the company hired college engineering graduates as sales trainees. Such a trainee would spend about one year traveling with a veteran salesperson to learn the business.
Although sales personnel were widely dispersed geographically, each communicated with Joines at least once a week. Davis also encouraged sales personnel to contact him directly on any important matters. He felt that, as president, this communication provided an accurate picture of what was going on in the marketplace.
All sales personnel were paid straight salaries. Trainees received between $18,000 and $21,000, while new sales personnel were paid $25,000. Senior sales personnel were paid up to $50,000, depending upon their performance and years of service. Turnover had not been a problem in the past. Most sales personnel had expressed satisfaction with their jobs. The company had never been successful in recruiting women for the sales force.
On occasions when a salesperson brought the company a particularly large and profitable order, he might be paid a commission. Davis, the president, periodically reviewed the contract orders for each salesperson and allocated commissions at his discretion. This review was done subsequent to the salesperson’s winning of the bid.
Although no sales quotas were assigned to sales personnel, each knew approximately what was expected of him. If the company’s annual sales volume approached $50 million, all sales personnel knew that Joines would be satisfied. Joines had come to feel that perhaps his expectations were a self-fulfilling prophecy. However, he was unsure of what might be the best way to improve the situation.
Joines did feel it was important to build some kind of automatic motivation into the compensation system. He believed that the present system of awarding commission on a somewhat random basis served as a reward for outstanding performance but did not provide an incentive for future improvement, since there was no guaranteed reward for greater effort. Consequently, he recommended to Rex Davis that compensation for contract sales personnel be changed from a straight salary to a commission and drawing account. He suggested that the commission be set at 5 percent of sales and that the drawing account be set at 90 percent of current salary. Thus, Green, the most senior salesman, with a salary of $50,000, would be given a draw of $45,000, or $3,750 a month. If he achieved the same sales volume as last year ($975,000), his total earnings would be $48,750. Harcourt, the top producing salesman for the past two years, with a salary of $45,000, would be given a draw of $40,500, or $3,375 a month, and if he maintained his $950,000 sales volume, his total earnings would be $47,500.
Davis argued that it would be a mistake to eliminate the security provided by a guaranteed salary. He believed that the company’s sales force was a good one, and he did not want to risk a reduction in morale or an increase in sales force turnover. As a result, he proposed that current salaries be retained, but that they be supplemented with a bonus for sales above quota. He suggested that each sales rep’s quota be set at twenty times current salary and that a bonus or commission of three percent be paid on all sales above quota. Thus, Green would retain his $50,000 salary and would be given a quota of $1 million; all sales above $1 million would receive a commission of 3 percent. Harcourt would continue to receive a salary of $45,000, and his quota would be $900,000.
Joines argued that Davis’s proposal did not provide a strong enough incentive for greater effort. Under the quota bonus proposal, an increase in sales of 5 percent would yield Green an increase of $712.50 in income over last year, but under the drawing account proposal, with a 5 percent increase in sales, he would receive $1,187.50 over the previous year.
- Do you agree that the addition of incentive pay is the best solution to Midwestern’s problem of flat sales? Why or why not?
- Evaluate Davis’s and Joines’s proposals for changes in the method of compensating Midwestern sales personnel.
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.