Fundamentals of Selling 13th Edition by Charles Futrell

Exercise 15

The salespeople were paid straight commissions on their dollar sales volume for the calendar year. The commission rate was 5 percent on the first $675,000, 6 percent on the next $225,000, and 7 percent on all sales over $900,000 for the year. Each week, the salespeople could draw all or a portion of their accumulated commissions. McDonald encouraged the salespeople to draw commissions as they accumulated, because he felt the salespeople were motivated to work harder when they had a very small or zero balance in their commission accounts. These accounts were closed at the end of the year, so the salespeople began the new year with nothing in their accounts.
EXHIBIT 1
McDonald Sporting Goods sales force.
The salespeople provided their own automobiles and paid their traveling expenses, of which all or a portion were reimbursed per diem. Under the per diem plan, each salesperson received $101.25 per day for Monday through Thursday and $47.25 for Friday, or a total of $452.25 for the normal workweek. No per diem was paid for Saturday or Sunday nights in the territory.
In addition to the commission and per diem, the salespeople could earn cash awards under two sales incentive plans that were begun two years earlier. Under one, called the Annual Sales Increase Awards plan, a total of $23,400 was paid to the five salespeople who had the largest percentage increase in dollar sales volume over the previous year. To be eligible for these awards, the salespeople had to show sales increases over the previous year. The awards were made at the January sales meeting, and the winners were determined by dividing the dollar amount of each salesperson's increase by his or her volume for the previous year, with the percentage increases ranked in descending order. Earnings under this plan for the current year are shown in Exhibit 2.
EXHIBIT 2
Earnings and incentive awards for the current year.
a Exclusive of incentive awards and per diem.
b Guarantee of $900 per week, or $45,000 per year.
Under the second incentive plan, the salespeople could win Weekly Sales Increase Awards for every week in which their dollar volume in the current year exceeded their sales for the corresponding week in the previous year. Beginning with an award of $9 for the first week, the amount of the award increased by $9 for each week in which the salespeople surpassed their sales for the comparable week in the previous year. If a salesperson produced higher sales during each of the 50 weeks in the current year, he or she received $9 for the first week, $18 for the second week, and $450 for the fiftieth week, or a total of $11,475 for the year. The salesperson had to be employed by the company during the previous year to be eligible for these awards. A check for the total amount of the awards accrued during the year was presented to the salesperson at the sales meeting held in January. Earnings under this plan for the current year are shown in Exhibit 2.
The company frequently used "spiffs" to promote sales of special items. The salesperson was paid a spiff, which usually was $18 for each order obtained for the items designated in the promotion. For the past three years, in recruiting salespeople, McDonald had guaranteed the more qualified applicants a weekly income while they learned the business and developed their respective territories. During the current year, five salespeople-Allen, Duvall, Edwards, Hammond, and Logan-had a guarantee of $900 a week, which they drew against their commissions. If the year's cumulative commissions for any of these salespeople were less than their cumulative weekly drawing accounts, they received no commissions. The commission and drawing accounts were closed on December 31, so each salesperson began the year with a zero balance in each account.
The company did not have a stated or written policy specifying the maximum length of time a salesperson could receive a guarantee if his or her commissions continued to be less than his or her draw. McDonald felt that the five salespeople who currently had guarantees would quit if these guarantees were withdrawn before their commissions reached $45,000 per year.
McDonald was convinced that MSG's salespeople's annual earnings had fallen behind earnings for comparable selling positions, particularly in the past six years. As a result, he felt that the company's ability to attract and hold high-caliber professional salespeople was being adversely affected. He felt strongly that each salesperson should be earning $90,000 annually.
In December of the current year, McDonald met with his comptroller and production manager, who were the only other executives of the company, and solicited their ideas concerning changes in the company's compensation plan for salespeople.
The comptroller pointed out that the salespeople who had guarantees were not producing the sales that had been expected from their territories. He was concerned that the annual commissions earned by four of the five salespeople on guarantees were approximately half of or less than their drawing accounts. Furthermore, according to the comptroller, several of the salespeople who did not have guarantees were producing a relatively low volume of sales year after year. For example, annual sales remained at low levels for Gatewood, O'Bryan, and Wates, who had been working four to five years in their respective territories.
The comptroller proposed that guarantees be reduced to $450 per week, plus commissions at the regular rate on all sales. The $450 would not be drawn against commissions, as was done under the existing plan, but would be in addition to any commissions earned. In the comptroller's opinion, this plan would motivate the sales force to rapidly increase sales because incomes would rise directly with sales. The comptroller calculated the incomes of the five salespeople who had guarantees in the current year as compared with the incomes they would have received under his plan (Exhibit 3).
EXHIBIT 3
Comparison of earnings in currcnt year under existing guarantee plan and earnings under the comptroller's plan a
a Exclusive of incentive awards and per diem.
From a sample check of recent shipments, the production manager had concluded that the salespeople tended to overwork accounts located within a 75-mile radius of their homes. Sales coverage was extremely light in a 100- to 150-mile radius of the salespeople's homes. The coverage seemed to result from the desire of the salespeople to spend most evenings during the week at home with their families.
He proposed that the per diem be increased from $101.25 to $121.50 per day for Monday through Thursday, $47.25 for Friday, and $121.50 for Sunday if the salesperson spent Sunday evening away from home. He reasoned that the per diem of $121.50 for Sunday would act as a strong incentive for the salespeople to drive to the perimeters of their territories on Sunday evenings rather than use Monday morning for traveling. Further more, he believed that the increase in per diem would result in a more uniform coverage of the sales territories and an overall increase in sales volume.
The consultant from New York City recommended that the guarantees and per diem be retained on the present basis, and he proposed that McDonald adopt what he called a Ten Percent Self-Improvement Plan. Under the consultant's plan, each salesperson would be paid, in addition to the regular commission, a monthly bonus commission of 10 percent on all dollar volume over sales in the comparable months of the previous year. For example, if a salesperson sold $90,000 worth of merchandise in January of the current year and $81,000 in January of the previous year, he or she would receive a $900 bonus check in February. For salespeople on guarantees, bonuses would be in addition to earnings. The consultant reasoned that the bonus commission would motivate the salespeople, both those with and those without guarantees, to increase their sales.
He further recommended discontinuing the two sales incentive plans currently in effect. He felt the savings from these plans would nearly cover the costs of his proposal.
Which of these plans, if any, should the company use to compensate its salespeople? Why?