Incentive Company compensates salespeople on a monthly basis at 5% of the average sales achieved in the previous three months and 10% if the monthly sales exceed the average monthly sales of the previous quarter. J. Smith realized that he would be paid twice the commission amount if he convinced his customers to either accelerate or defer the actual sales to match the 10% required pattern. He consistently asked customers for the following types of favors:
● If he needed a low sales quarter so that the next quarter would be higher, he gave customers goods out on approval with the understanding that they would formally buy the goods shortly after the end of the low sales quarter.
● In a high sales quarter, he asked known customers to agree to the goods but to have the product shipped after quarter end—a practice known as “bill and hold” or channel stuffing.
● Since salespeople were not held accountable for returns (“reverse logistics”), he encouraged customers to buy in high sales periods, telling them that they could return the goods early in the next low sales month.

a. Is J. Smith just smart or is he violating the ethical standards presented in Chapter 1 regarding competence, confidentiality, integrity, and credibility?

b. Assume that you are a manager at Incentive Company. After hours at a social setting, J. Smith bragged that he had successfully gamed the system for two years. If you confronted J. Smith, what would you say?

c. As the manager, you are contemplating changing the compensation system for sales representatives to a salary and a consistent 5% commission. How can cost-volume-profit analysis help you anticipate what the effect on profits of each plan would be?