s. Hartman, sales manager of Angelina Fashions, had been requested by Mr. Marshall, president, to review...

Transcribed Image Text:

s. Hartman, sales manager of Angelina Fashions, had been requested by Mr. Marshall, president, to review the firm's method of handling salespeople's expense accounts. Mr. Marshall had voiced the opinion that the com- pany was being overly generous to its sales force without any valid reason. Angelina Fashions was founded in 1992 by Mr. Marshall for the purpose of manufacturing and distributing a relatively small line of high- styled, expensive, women's coats, jackets, and suits. By virtue of having some rather talented designers, the company had grown rapidly to become a $20 million (in annual sales) company. The product was sold directly to exclusive wom- en's clothing boutiques by 10 highly experienced salespeople. Since it was necessary in the initial stages of the business to keep selling expenses in line with sales volume, the firm had adopted the policy of paying a flat 6 percent commission on all sales, with the salespeople paying all of their own expenses. So, on average, the annual compensa- tion was $120,000 per salesperson. This combination compensation-expense plan had proved to be highly satisfactory to both the company and the salespeople in the past. For instance, Matt Walker, sales representative in the southeastern states, was an enthusiastic support of the plan. He said, "It's the only way to sell. I really watch my expenses this way and what I don't spend is mine." In recent years, however, Mr. Marshall had become increasingly bothered by the dollar amount of selling expenses. Because there were ten salespeople, total dollar selling costs last year were about $1,200,000 (or 6 percent of company sales revenue). From his knowledge of what the salespeople actually spent for expenses in the field, Mr. Marshall knew that their take-home pay was substantial. He knew that Matt Walker's actual expenses would run approximately $32,000 a year $11,200 for transportation and $20,800 for field living costs. This meant that Mr. Walker was easily taking home a minimum of $88,000. He wondered if the company would be better off if it lowered the commission rate paid to the salespeo- ple and assumed responsibility for all expenses. He asked Ms. Hartman to study the situation and prepare recommendations on it. Ms. Hartman had sounded out the sales force regarding the idea of the company's assuming responsibility for expenses and had found that the entire sales force was strongly opposed to the idea. Ms. Hartman liked the present system since it was easy to administer; she was not bothered by hav- ing to audit or handle expense accounts. In addi- tion, Ms. Hartman enjoyed managing a sales force with high morale. She did not want to do anything that would possibly disturb the rather easy posi- tion she now had. She fully realized that at present her sales force required practically no manage- ment at all. About the only contact she had with them was the two conventions each year at which the new season's lines were introduced. Other than that, the salespeople completely managed themselves and were all performing excellently. Turnover had been nonexistent; the company had not lost a single salesperson since it started. On the other hand, Ms. Hartman realized that Mr. Marshall was an extremely dominant and aggres- sive individual whose ideas and opinions were not to be put aside lightly. Hence, Ms. Hartman had formulated three alternative plans for handling compensation and expenses: 1. Plan number one consisted of reducing the commission rate to 4 percent on sales volume with the company paying all expenses. 2. Plan number two consisted of reducing the commission rate to 3 percent plus a bonus of 1 percent of all sales upon attainment of a sales volume quota set at $2,000,000 for the year. The firm would pay all expenses. 3. Plan number three provided for a $40,000 annual salary for each salesperson, plus a 5 percent commission on all sales over $1,200,000. Again, the firm would pay all expenses. When Mr. Marshall saw these plans, he objected strongly, because he felt that some form of limited expense accounts would be necessary; otherwise the salespeople would merely pad their expenses to make up for the reduced compensation. Mr. Marshall suggested that plan 3 could be adopted with the following changes: a 4 percent commission rate on sales over $1,200,000; plus, a flat-sum expense account of $20,000 per year per person. Ms. Hartman knew that the sales force would not be happy with any of the proposals, but they would be particularly incensed by the fixed-expense plan. Further, she knew that the salespeople gained some tax advantages from the present system and that they would not look kind- ly upon having those advantages discontinued. Questions: 1. What would the typical salesperson earn in total compensation under the four plans being proposed? 2. Which of these four plans makes the most sense for Angelina Fashions? Explain your answer. 3. Create your own compensation plan that you think would be best. Be sure to include a recommendation for how to handle expenses. 4. How would you approach Mr. Marshall to convince him to go with your own (the best) plan? s. Hartman, sales manager of Angelina Fashions, had been requested by Mr. Marshall, president, to review the firm's method of handling salespeople's expense accounts. Mr. Marshall had voiced the opinion that the com- pany was being overly generous to its sales force without any valid reason. Angelina Fashions was founded in 1992 by Mr. Marshall for the purpose of manufacturing and distributing a relatively small line of high- styled, expensive, women's coats, jackets, and suits. By virtue of having some rather talented designers, the company had grown rapidly to become a $20 million (in annual sales) company. The product was sold directly to exclusive wom- en's clothing boutiques by 10 highly experienced salespeople. Since it was necessary in the initial stages of the business to keep selling expenses in line with sales volume, the firm had adopted the policy of paying a flat 6 percent commission on all sales, with the salespeople paying all of their own expenses. So, on average, the annual compensa- tion was $120,000 per salesperson. This combination compensation-expense plan had proved to be highly satisfactory to both the company and the salespeople in the past. For instance, Matt Walker, sales representative in the southeastern states, was an enthusiastic support of the plan. He said, "It's the only way to sell. I really watch my expenses this way and what I don't spend is mine." In recent years, however, Mr. Marshall had become increasingly bothered by the dollar amount of selling expenses. Because there were ten salespeople, total dollar selling costs last year were about $1,200,000 (or 6 percent of company sales revenue). From his knowledge of what the salespeople actually spent for expenses in the field, Mr. Marshall knew that their take-home pay was substantial. He knew that Matt Walker's actual expenses would run approximately $32,000 a year $11,200 for transportation and $20,800 for field living costs. This meant that Mr. Walker was easily taking home a minimum of $88,000. He wondered if the company would be better off if it lowered the commission rate paid to the salespeo- ple and assumed responsibility for all expenses. He asked Ms. Hartman to study the situation and prepare recommendations on it. Ms. Hartman had sounded out the sales force regarding the idea of the company's assuming responsibility for expenses and had found that the entire sales force was strongly opposed to the idea. Ms. Hartman liked the present system since it was easy to administer; she was not bothered by hav- ing to audit or handle expense accounts. In addi- tion, Ms. Hartman enjoyed managing a sales force with high morale. She did not want to do anything that would possibly disturb the rather easy posi- tion she now had. She fully realized that at present her sales force required practically no manage- ment at all. About the only contact she had with them was the two conventions each year at which the new season's lines were introduced. Other than that, the salespeople completely managed themselves and were all performing excellently. Turnover had been nonexistent; the company had not lost a single salesperson since it started. On the other hand, Ms. Hartman realized that Mr. Marshall was an extremely dominant and aggres- sive individual whose ideas and opinions were not to be put aside lightly. Hence, Ms. Hartman had formulated three alternative plans for handling compensation and expenses: 1. Plan number one consisted of reducing the commission rate to 4 percent on sales volume with the company paying all expenses. 2. Plan number two consisted of reducing the commission rate to 3 percent plus a bonus of 1 percent of all sales upon attainment of a sales volume quota set at $2,000,000 for the year. The firm would pay all expenses. 3. Plan number three provided for a $40,000 annual salary for each salesperson, plus a 5 percent commission on all sales over $1,200,000. Again, the firm would pay all expenses. When Mr. Marshall saw these plans, he objected strongly, because he felt that some form of limited expense accounts would be necessary; otherwise the salespeople would merely pad their expenses to make up for the reduced compensation. Mr. Marshall suggested that plan 3 could be adopted with the following changes: a 4 percent commission rate on sales over $1,200,000; plus, a flat-sum expense account of $20,000 per year per person. Ms. Hartman knew that the sales force would not be happy with any of the proposals, but they would be particularly incensed by the fixed-expense plan. Further, she knew that the salespeople gained some tax advantages from the present system and that they would not look kind- ly upon having those advantages discontinued. Questions: 1. What would the typical salesperson earn in total compensation under the four plans being proposed? 2. Which of these four plans makes the most sense for Angelina Fashions? Explain your answer. 3. Create your own compensation plan that you think would be best. Be sure to include a recommendation for how to handle expenses. 4. How would you approach Mr. Marshall to convince him to go with your own (the best) plan?