Incentive Plan Return On Investment Case Study

Overview

Drew had worked at Celluar Network for about five years. He started as an HR generalist right out of school and was grateful for the experiences that he had been able to gain in such a short time. After three years as an HR Generalist, he moved into his current role in the compensation department. He really enjoyed compensation and was interested in learning more. He was an up-and-comer in the HR function and really had a knack for understanding how compensation worked. His next project was going to put that to the test.

His next task was to create a compensation plan that would incentivize salespeople in the cell phone stores to sell more high-margin items. The company was going through a restructuring and had realized that the incentives did not align to the new behaviors that it wanted its employees to exhibit. Anderson oversaw the creation of the new incentive program that would align to the new business model of maximizing profit margin.

Cellular Network

Cellular Network was a national cellular phone chain that sold all different types of cellular phones, provided service for those phones, and sold several different types of cellular phone accessories. Throughout the years Cellular Network was quite profitable and had focused its salespeople on selling phones. After all, that is how Cellular Network made it big. It was one of the first companies to embrace cellular technology and market it to a broad population. Over the last several years competition had snuck into the market and Cellular Network was questioning whether it had the right structure. Its current line of thinking was to minimize the selling of hardware and, eventually, get out of the hardware business altogether. Instead, Cellular Network would focus on providing service which required less overhead and fewer deals with external hardware providers.

Current Sales Model

The current incentive plan at Cellular Network was set up to maximize the sale of cellular phones. In this model, the sales of phones, service plans and accessories all had the same commission rate which was 5%. Each cell phone cost approximately $850 compared to the average service plan which was $200 and the average accessory which was $25. In any given month, a full-time salesperson sold an average of 85 phones, 30 service contracts, and 130 accessories. The average margin for Cell U Max was 15% for cell phones, 40% for service plans and 30% for accessories.

New Incentive Scheme

Cellular Networks new incentive model was designed to shift the sales mix to maximize sales of higher margin products like service plans and accessories. Drews project was key to executing this new strategy. Having been in his role for a couple of years, Anderson knew he needed to run a pilot before rolling out his new incentive plan to the entire organization. Luckily, he had several stores in which he could do this. Taking advice from his manager, Anderson selected five stores to pilot this incentive program and adjusted the commission payout for each product. In the new model, the commission rates were 2% for each cell phone sold, 20% for each service plan and 10% for each accessory. The results of the pilot drove a shift in sales mix and incremental sales of 5 cell phones, 15 service plans and 20 accessories per salesperson.

Using the data from the pilot, Drew calculated the average monthly incremental revenue to the organization and the total average income per salesperson per month. Once he completed his analysis, he sat back in his chair and asked himself, Is this the right incentive plan for what were trying to accomplish?

Case Study Questions

1. Compare the average monthly commission per salesperson in the old plan versus the average monthly commission per salesperson in the new plan. What are the differences?
2. Why might the number of cell phones sold have increased when the commission rate for each phone sold decreased?
3. Anderson asked himself Is this the right incentive plan for what we're trying to accomplish? Is it? How would you make that determination? What are the key factors to consider?
4. If you were Drew, what adjustments would you make to the new incentive plan, if any, after the pilot before rolling this out to all your stores?
5. What additional HR implications might shifting the sales mix and incentive compensation have that Cellular Network would need to consider?