Most companies compensate their sales forces with a combination of a fixed salary and a commission that is a percentage of sales. Consider two companies competing for the same customers—for example, Kellogg’s and Post cereals. Suppose that Kellogg’s pays its sales force a large fixed salary and a small commission, while Post pays its sales force a small fixed salary and a large commission. The total pay on average was the same for both companies.
1. Compare the sales cost structure of Kellogg’s with that of Post. Which has the larger fixed cost?
Which has the larger variable cost? How will this affect each company’s risk? (Focus on how the company’s profits change with changes in volume.)
2. What incentives does each pay system provide for the sales force?
3. Might either incentive system create potential ethical dilemmas for the sales personnel? Explain.