Can someone summarize this and tell me what's going on in this case?

Case:

Federico Garcia, vice president of sales for Puget Sound Building Materials, a company based in Tacoma, Washington, wasn’t all that surprised by what the company

President Michael Otto and CFO James Wilson had to say during their meeting that morning.

Last year, launching a major expansion made sense to everyone at Puget, a well-established company that provided building materials, as well as manufacturing and installation services, to residential builders in the Washington and Oregon markets. Puget looked at the record new housing starts and decided that it was time to move into the California and Arizona markets, especially concentrating on San Diego and Phoenix, two of the hottest housing markets in the country. Federico carefully hired promising new sales representatives and offered them hefty bonuses if they reached the goals set for the new territory over the following 12 months. All the representatives had performed well, and three of them had exceeded Puget’s goal—and then some. The incentive system he’d put in place had worked well. The sales reps were expecting handsome bonuses for their hard work.

Early on, however, it became all too clear that Puget had seriously underestimated the time that it would take them to build new business relationships and the costs

associated with the expansion, a mistake that was already eating into profit margins. Even more distressing were the most recent figures for new housing starts, which we're heading in the wrong direction. As Michael said, “Granted, it’s too early to tell if this is just a pause or the start of a real long-term downturn. But I’m worried. If things get worse, Puget could be in real trouble.” James looked at Federico and said, “Our lawyers built enough contingency clauses into the sales reps’ contracts that we’re not really obligated to pay those bonuses you promised. What would you think about not paying them?”

Federico turned to the president, who said, “Why don’t you think about it, and get back to us with a recommendation?” Federico felt torn. On the one hand, he knew that the CFO was correct. Puget wasn’t, strictly speaking, under any legal obligation to pay out the bonuses, and the eroding profit margins were a genuine cause for concern. The president clearly did not want to pay the bonuses. But Federico

had created a first-rate sales force that had done exactly what he’d asked them to do. He prided himself on being a man of his word—someone others could trust. Could he go back on his promises?

Answer rating: 100% (QA)

Summary Federico hired promising new sales reps and promised them big incentives if they met the new ... View the full answer