Manoil Electronics manufactures and sells electronic components to electronics stores. The controller is preparing her annual budget and has asked the sales group to prepare sales estimates. All members of the sales force have been asked to estimate sales in their territory for each of the organization’s 10 major products. The marketing group is paid a salary and a commission based on sales in excess of some target level. You have discovered that the sales manager uses the sales estimates to develop the target levels at which commissions begin. Specifically, the sales manager takes the sales estimate, adds 10%, and the result becomes the sales hurdle level. If sales are less than the hurdle level, no commissions are paid. If sales are above the hurdle level, commissions are paid at varying rates.
Required
(a) What is the motivation of the sales force if they know the relationship between their estimate and the target level of sales?
(b) What is the likely consequence of basing the organization’s budgets on these estimates?
(c) If you were the controller in this situation and were responsible for both the reward system and the budgeting system, what would you do?