Case Study: Designing a Salesforce Compensation Plan You have to create a sales compensation plan for your company's sales team. Your company, Acme Cycle, makes bicycles which it sells to large national retailers such as Big 5 and REI as well a variety of independent cycling stores. Sales reps have a mix of assignments: some handle just a single national chain, such as Big 5, and focus mainly on selling to that chain's headquarters. Other sales reps around the country have geographic territories and call on individual retail customers within that territory (Big 5, REI, independents...). For example, one sales rep is responsible for all of the company's retail customers in the states of Arizona and Nevada only. Sales reps split the sales commission between two of them when one is selling to the national headquarters of a chain and a geographic sales rep is selling to the local stores of that chain. Some of the national chain reps feel that their chain doesn't get enough attention from the territory sales reps; conversely, some territory reps feel that the national rep is not doing a good enough job of managing sales to the chain's headquarters. As a result, sales reps spend a lot of time squabbling with each other over whether the commission split is fair or not. The company's sales have been stagnating in recent quarters, it is losing market share, and shareholders and the board of directors are upset. The CEO has given three of you the task of fixing the problem. One of you is VP of Sales, one is the Chief Financial Officer (CFO) and one is the VP of Human Resources. You decide you have to come up with a new method of paying and managing the sales reps that will motivate them to increase sales. Here are the three alternative plans you are considering: 1) Pay higher commissions: All sales reps currently receive a commission of 4%. New plan: Triple the commission on all sales to 12%. But if both a headquarters sales rep and a geographic territory sales rep are involved in the same sale, they still have to split the commission. 2) Put everyone on salary: Put all the members of the sales force on salary (which will make up about 90% of their total compensation), assign quarterly sales quotas (set by the VP of Sales) to each of them, and pay them a small 10% bonus over and above their salary if they reach those targets. 3) Create Sales Teams: For national chains: Each national chain customer like REI will have a single account team that covers the chain's HQ and the individual stores within that chain across the country. Each sales team will be compensated as a team and split the commissions between themselves equally. Quarterly sales quota levels will be set for the team by the VP of Sales at the beginning of every quarter. Sales teams will be given great autonomy in determining how they will allocate their time and effort to reach their sales objectives. For independent stores: These stores will be handled by territory sales reps. These stores will be their only responsibility and the territory reps will still be paid according to the current compensation plan -- the question of commission splits won't apply any longer. Here's your assignment: There are three executives tasked with this project: Chief Financial Officer, VP of Sales, VP of Human Resources. Think about the mindset and motivations that each one will have in assessing each of the three alternative plans above - their perspectives will be different based on their role and how their performance in that role is evaluated! As a result, the Chief Financial Officer is going to be focused on revenue, costs and in particular on the bottom line profit. The VP of Sales, in contrast, will be primarily focused on revenue, not profit, and on attracting and retaining a top-notch sales force. The VP of HR will be heavily focused on maintaining workplace harmony among the employees and to a lesser extent on sales force recruitment/retention. As a result, the evaluation criteria for the three plans will be viewed differently by each executive, and may include sales force recruitment/retention/motivation, financial viability, effective teamwork, perceived fairness -- and of course, raising company revenue. Please answer the following questions, using bullet points. A bullet point requires a sentence, not just a word or two. NOTE: This case is mostly about understanding human motivation, which we all know something about at an instinctive level. There is no single right answer. Instead, this case requires that you think about how each compensation plan will likely affect motivation and behavior of the sales reps, and how each of the three executives will have their own bias about understanding the effect of these three different plans -- and will be heavily influenced by how they themselves are evaluated. Since there isn't a single right answer to understanding human motivation, you just need to show reasonable assumptions and explanations for your analysis. 1. In financial terms, what is the main business problem that management is trying to address? What is at least one underlying cause of this business problem? (2 pts) 2. Discuss each of these three alternative plans above, considering the perspective of each of the three players: VP of Sales, the Chief Financial Officer and the VP of Human Resources. For each of the executives, what is one strength and one weakness of each of the compensation plans? Think about your answer in terms of the perspective of each VP and of the business problem (and its cause) you identified in Q 1 that they're trying to solve. Your answer will require nine categories, with a strength and a weakness for each one: 3 executives times 3 plans = 9 (4 pts) 3. For EACH of the three executives, which compensation plan would they like the most? Why? Would their choice be likely to solve the company's main business problem and its likely underlying cause