Develop an insentive structure
Executive summary Our company operates in a small but lucrative market. We make expensive hi-tech widgets. Due to one of the broadest product portfolios in the market we have a sustainable, long-term relationship with our customers. The market we operate In is narrow from both customers and competitors’ perspective. At this point In time we command approximately 40% market share, while our closest competitor holds 25%. The remaining 35% is divided between 6 other major competitors. From our customers perspective there are 80 companies, 15 of which make up 60% of the market.
For our employees the Industry is highly demanding. Due to our hi-tech products we need a highly qualified sales force. Also due to proprietary technology we prefer to recruit sales personnel from within company. We prefer our sales employees have a strong engineering background. Furthermore we put great emphasis on training our sales personnel. We lost two of our “Key Account” sales personal to our largest competitor. Due to the competitive nature of our Industry and the great investment input into our sales force employee retention is of paramount importance.
A downturn in the industry is highly likely in the near future. Problems to solve Compass strategic goals for the next year are: Increase Market Share Improve Customer Satisfaction Increase Gross Margin Additionally we should not forget that we need to retain our employees and live through Industry downturn as painlessly as possible. Retailing salespeople Is a top priority, our sales force represents a large investment which is not easily replaced. We should not undervalue the experience and personal relationships developed by our sale force.
We have to decide: What mix of compensation will we use? How will we position our total compensation relative to the industry? What kinds of incentives will we use? Will we use accelerators, if so what kind? How will we motivate and retain our sales force? Recommendations First of all we should review all options, consider utility of each one to reach company goals, then we would be able to choose which option suits our needs most and develop detailed compensation plan to achieve goals mentioned above. Base/ Commission Plan.
Using this plan wont give us any leverage to improve CSS (Customer Satisfaction) or Increase Gross Margin Base/Commission/MOM Plan. This plan seems more suitable for our situation through MOB we obtain control over caching all over goals. It is important to remember that the company operates in a highly lucrative and unique market, which makes commissions not a best choice of incentive, as may become a heavy burden on the company’s profit Base/MOB Plan. This option best fits our needs. It allows us to accelerate attainment of our goals through Mobs. If structured correctly there would be no need to pay costly commissions. Sing a plan that includes commissions will motivate our sales force, FIFO products are high priced this will not fit our requirements. This plan Base salary would be over 70% of compensation to ensure employee retention (a Bird in the hand is worth two in the bush). High Base salary might force layoffs in critical situations, being able to retain employees through hard times will increase employees respect and build loyalty towards our company. The final blow to this plan is that it doesn’t give opportunities to effectively influence CSS and Gross Margin growth.
Two additional options for incentive packages in compensation: Non- Qualified Stock Option Plan (SOP). This plan might appear suitable upon first examinations. SOP might be a useful tool in retaining employees; also it is inexpensive for a company to implement which is a positive since we are expecting a downturn in the industry. But in our case there is a large drawback, our sales force should be interested in sales instead of stock market. Employee Stock Purchase Plan (SSP). This option is similar to previous one, but applies to our needs even less than SOP.
SSP suggests employees to set aside part of their salary to purchase stocks, even though they will get a discount when an industry going through a downturn such compensation is not attractive due to a high likelihood of depreciating stock value. Considering all options we are implementing Base/MOB Plan. What Ratio should we implement? Since our sales force has a high level of influence in reaching companies goals we should consider 50/50/200 mix. Let’s not forget that we have a highly qualified sales force who are engineers first and sales second, then 60/40/180 will work better. What Mob’s are we implementing?
How are we going to distribute weight between Mob’s? (It is important to remember that Mob’s should be quantifiable and attainable) No more than 4 Mobs should be implemented to retain effectiveness. 1) Customer Satisfaction (20%) 2) Gross Margin (25%) ) Market Share (25%) 4) sales (30%) These Mobs will directly influence achievement of goals set by company’s President. CSS improvement will increase customer loyalty not only due to wide product portfolio, which is highly important during industry downturn and will help us not only retain but also attract customers (Increase Market Share).
Mob’s payout system: Target (%) Improvement (%) Payout (%) 0-50 10 75 15 20 18 70 110 125 25 150 180 MOB for Gross Margin increase will make sales employees work not only towards sales grows (which can be achieved through price drop), but also towards obtaining higher margins. Furthermore because of suggested percentile ratio of GM and MS Mob’s obtaining higher margins would be as important for employees as increasing sales (Market Share) Let’s examine how our compensation package fits in to the overall market.
Considering that we lost two “Key Account” sales personnel, it is very important to retain our sales force; 70% compensation relative to the industry is a reasonable measure to achieve this. Our MOB system would encourage our employees to work more effectively on achieving company goals. We might also consider the introduction of some personal Mobs, which will concentrate on arsenal qualities of an employee and increase his/her effectiveness.
It is highly important to keep in mind that we are developing a compensation plan for sales force. Employees on this field are used to commission plans and would be outraged if we would switch to Mob’s right away, even though MOB plan would only benefit them. That’s why we must partially keep commissions for a year or two. As industry is going through a downturn our employees will figure out that Mob’s would benefit them better then commissions. For the first year we would choose Base/Commission/ MOB Plan, with 50/50/200 mix.