MAR4403 UFL Madison Fiber Corporation Sales Compensation System

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Business Finance

University of Florida

Description

The senior management team at Madison Fiber Corporation is considering altering the system by which
their salesforce is paid. All the concerned parties (e.g., the salespeople; the sales manager; the VP
Marketing etc.) seem to have conflicting views on what the “best” course of action is in terms of any type
of change to the salesforce compensation system. Some even suggest doing nothing, leaving the current
system – 100% salary, plus a “subjectively assessed” annual bonus – in place.

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College of Business FLORIDA INTERNATIONAL UNIVERSITY MAR4403 — SALES MANAGEMENT Prof. Rafael Soltero 36-Hour Final Assignment > Case – Madison Fiber Corporation The senior management team at Madison Fiber Corporation is considering altering the system by which their salesforce is paid. All the concerned parties (e.g., the salespeople; the sales manager; the VP Marketing etc.) seem to have conflicting views on what the “best” course of action is in terms of any type of change to the salesforce compensation system. Some even suggest doing nothing, leaving the current system – 100% salary, plus a “subjectively assessed” annual bonus – in place. In hiring you as a consultant, the management team at Madison Fiber has clearly indicated that they think they have done a pretty solid job of putting all the logical “options” with respect to how the salesforce could be compensated “on the table”. Thus, they recommend that you simply act as an unbiased outside expert and provide them guidance as to what compensation plan / system is best for the company going forward. In your analysis, you may wish to consider all of those aspects of any material / concepts we covered in MAR4403 which seem most germane to this situation. Management at Madison Fiber expects your report to really cover two areas in particular: (1) Compensation Plan Change – You should critique all FIVE of the options the company faces with respect to salesforce compensation, and then RECOMMEND one to management. Your recommendation should be grounded in solid analysis and reasoning pertinent to this case; yet it should also be linked more broadly to all that you’ve learned in the course. Here you should also offer insights as to the amount of compensation a Madison salesperson should make under any new scheme (i.e., more, less, or about the same TTC as at present. See case, top p. 7). (2) Excited by the prospect of getting expert outside advice, the management team at Madison Fiber would also like any other insights or recommendations you might have, even if preliminary, on other elements of their sales management system which, in your opinion, could use some “fine-tuning” or refinement (e.g., training, deployment, first-level management etc.). Be careful here, as key elements of their sales management system may only be mentioned in passing (e.g., a sentence or two). Nevertheless, you are expected to critique how they run their salesforce if elements of it which are mentioned seem less than optimal, regardless of how little information is given. OTHER INSTRUCTIONS: 1. Please type your work. 2. Focus less on case facts and data and more on the implications of the facts, data and themes in the case. Case data and facts are only useful if they support the strategies & policies you will ultimately recommend. 3. Please organize your work to the greatest extent possible. Make use of section headings and subheadings, bullet and numbered lists and so on. (See the “Suggested Format” on the backside of this cover page as one way you could proceed). 4. THIS EXAM IS DUE in 36 hours from when the case was made available to you. will be commensurately penalized. LATE EXAMS 5. Please submit in Canvas under the correct assignment. Please use WORD (DOC) or PDF as the file format for the report. Page 1 of 2 Suggested Format for MAR4403 Final Exam The following is JUST A SUGGESTED format for organizing your work. As I always say in class, the amount of “emphasis” you place on any given area should always be driven by the severity of the issue(s) the company in question is dealing with, plus your own take on the business situation at hand as an aspiring businessperson and manager. Some of the topics / areas you may wish to address in your work might look like this:  Introduction, Your Role, and Your Objective(s) in the Analysis  Statement / Summary of the Problem(s) the Organization is Facing  Short Summary of the Key Alternatives Available for Solving the Organization’s Problems  The Decision Criteria you have Chosen, plus any Weighting of these. Once you’ve listed and organized these (a table is always good), they’ll help you assess the Merits and Drawbacks of each of the Alternatives. Note that you’ll often have to come up with these yourself, as they are seldom in the case (for example and for one hypothetical case, one criteria might be “restoring the company to profitability” while another might be “to minimize the expenses of the salesforce”). Again, look to the case and answer this question: what are the key thing(s) that the decision maker is worried about or trying to correct. The answer to this question (or small set of questions, for more complicated case situations) will usually be your “decision criteria”.  “Body of the Analysis” – this is where you can do whatever you like, based on your take on the situation and what needs to be tackled, discussed, qualitatively or quantitatively analyzed etc. This section should form the bulk of your work, and should be organized by whatever topics / headings you wish. Don’t forget to use headings, sub-headings, bullet-lists etc. to help keep your work organized here. Note – you’ll almost certainly be well-served in the body of your analysis to consider both quantitative as well as qualitative information in the case. To neglect one or the other would be basically to propose an action plan to management based on an “incomplete information set”. In short, not good. FOR THE Madison Fiber Case a good idea in terms of organizing the main portion of your analysis might be to do a “pros / cons” of each of the five compensation plan options (use a table recommended), and then “pick one”, defending your position as best as possible. Any other areas you tackle as a review of Madison’s other sales management areas can just be handled with subheadings (e.g., “Training”) and then related text and analysis.  Conclusions – a quick recap of what your plan and implementation path will mean to management (and the company etc.) if they decide to adopt it, which hopefully they will, because it’s so sound.  Recommendations  Attachments: Include any material pertinent to support your report and recommendation. Page 2 of 2 DardenBusinessPublishing:216471 UVA-M-0425 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. MADISON FIBER CORPORATION Early in February 2000, executives of the Madison Fiber Corporation of Baltimore, Maryland, were discussing some proposals to modify the company’s sales-force compensation plan. The discussion had been prompted by the recent broadening of the product line and by widespread disenchantment with the current compensation plan, a straight salary system with an annual bonus set by means of subjective evaluations. Furthermore, Madison executives had recently reorganized the sales force. They believed that, if changes in compensation were to be made, now was the most appropriate time to make them. Company and Industry Background Madison produced synthetic fibers, yarns, and fabrics. The company was founded in 1955 to serve a rapidly changing carpet-manufacturing industry. Subsequent to its founding, the firm made several major breakthroughs in synthetic fiber technology and production. These advances enabled Madison to become a significant supplier of synthetic carpet fiber as well as to make competitive entries into related fields. Madison’s three major product lines were synthetic carpet fiber, yarn, and industrial fabric. Madison’s synthetic carpet fiber—a monofilament—was used by leading carpet mills that produced tufted and needle-punch carpets for commercial and residential use. The company manufactured synthetic yarns by twisting monofilament synthetic fibers into multifilament and ribbon styles for a variety of applications, such as webbing in aluminum lawn furniture, grilles on high-fidelity speakers, and automobile seat covers. By weaving the yarns, the company manufactured industrial fabrics used as bagging for products like seeds, beans, fertilizers and minerals, and sheeting for such applications as tents, swimming-pool covers, industrial wraps, and tarpaulins. Because monofilament fiber was the base material for carpet fiber, yarn, and fabric, companies competing in any one of those markets tended to compete in others as well. This case was prepared by Derek A. Newton, John Tyler Professor of Business Administration, and revised in 2003 by Alexandra Ranson (MBA ’04), under the supervision of Robert E. Spekman, Tayloe Murphy Professor of Business Administration, as the basis for class discussion rather than to illustrate either correct or incorrect handling of an administrative situation. As all data have been disguised, this case should not be used for research purposes. Copyright © 1993 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 7/04. Page 1 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -2- UVA-M-0425 Madison executives expected competitive pressure from industry overcapacity to become intense by the end of 2000. They ranked Madison fifth among its competitors in manufacturing capacity and estimated that the largest firm in the industry was four times Madison’s size. Selected market estimates, forecasts, and sales data for carpet fiber and other Madison products are shown in the table below. Actual Sales Volume (000s of pounds) Forecast 1998 1999 2000 2001 2002 1035.2 1097.8 1119.8 1142.2 1165.0 1998 1999 2000 2001 2002 Madison carpet-fiber sales $106.1 $109.3 $115.8 $122.8 $130.1 Madison market share (est.) 10.5% 10.6% 11.0% 11.6% 12.2% Madison yarn sales $51 $54.9 $67.7 $83.0 $102.7 Madison fabric sales - $3.1 $15.3 $16.9 $18.5 Madison total sales $157.1 $167.2 $198.8 $222.6 $251.4 Carpet-fiber industry (est.) Sales value ($000s) The carpet fiber market For many years the dominant materials used in carpet manufacturing were of natural origin such as wool. During the 1960s, synthetic fibers began to take a larger share of the market. Madison and its competitors moved quickly to increase their capacities for manufacturing synthetic fiber. After stagnant sales in the early 1990s, in 1997 and 1998 the carpet-manufacturing industry experienced strong sales growth, and many firms were at or approaching full capacity. Madison executives believed that the period from 1999–2004 might promise a 4 percent annual increase in industry sales. Accordingly, using 1995 capacity as the base of 100, Madison executives were in the process of adding capacity to increase this figure to 115 by the end of 2000 and to 155 by the end of 2004. Most carpet customers (with a few notable exceptions) were located in the South with the majority in or around Dalton, Georgia. The yarn market Because of the many potential applications for synthetic yarn and fragmented industry data, company executives could not estimate potential sales volume or Madison’s share of the syntheticyarn market. Company executives believed that Madison’s sales were limited only by its ability to create customers and by available machine time. The company backlog of firm orders extended into the middle of 2000. The available data indicated to company executives that Madison had a small and spotty share of some of the applicable markets for synthetic yarns in 1999. For instance, Page 2 of 10 DardenBusinessPublishing:216471 -3- UVA-M-0425 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. they estimated they had 8 percent of the grille cloth market, 15 percent of the static automobile seat-cover market, and 8 percent of the declining market for lawn-furniture webbing. Most of Madison’s yarn customers were located near Chicago or other large industrial cities. Many potential yarn markets and customers were not being covered at all. The industrial fabric market Because executives had waited to develop truly superior products, the firm was late in entering the industrial-fabric market. Madison fabric products were introduced during the last quarter of 1998. Demand for this material was so great in 1999 that the company was able to sell all of its limited production. There was no discernable geographic pattern among potential fabric customers. Madison’s Marketing Activities Madison was organized into four departments: marketing, finance and administration, operations, and research and development. Each department was headed by a vice president, who reported to the company president. Three of the departments employed fewer than 60 people; operations employed more than 400. Reporting to the vice president for marketing were a customer-service manager, a sales manager, and three product-development managers (one for carpet fibers, one for yarns, and one for industrial fabrics). The customer-service manager handled telephone contacts with customers, solving customers’ billing, delivery, and technical problems. She also served as an “inside” sales representative, referring sales leads and requests for product information to the appropriate sales rep. These inside sales activities, however, were always credited to the sales rep assigned to the account. The product development managers helped sales reps and customers solve technical problems; analyzed the current and potential market for their products; suggested productdevelopment or line-extension opportunities; developed specifications for new and proposed products; and forecasted demand for new, existing, and proposed products by making appropriate economic and profit analyses. The product-development managers were expected to be technically expert with regard to customers’ manufacturing techniques, as well as familiar with the market place and likely prospects for new and existing product offerings. Unlike a typical “brand manager,” the product-development manager had no responsibility for sales volume or profits. The sales manager developed sales plans by product, territory, and account and also directed the sales force. The current sales manager had been promoted to his present position in January 1999, after ten years as a Madison sales rep. He was 42, a college graduate, and earned about $90,000 a year in salary and management bonus. Page 3 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -4- UVA-M-0425 Because the equipment used to manufacture synthetic fibers, yarns, or fabrics represented a substantial capital investment, the company’s basic business strategy was to attempt to operate at full capacity (normally two shifts) at all times. Fluctuations in the consumers’ demands for carpeting and competitive or technological developments, however, often created undersold or oversold conditions. Capacity-forecasting and profit problems led Madison executives to take steps to reduce the firm’s heavy reliance on the carpet-manufacturing industry. Accordingly, they decided in 1997 to broaden research and development in yarn and fabric areas for other industries. In 1998, Madison diversified into industrial fabrics and began a marketing strategy to increase the proportion of sales of products other than carpet fiber. In the carpet market, Madison’s new strategy was to increase its share of business with high-volume accounts where it could become the primary supplier. Historically, Madison had been the secondary or tertiary supplier in such accounts, a condition that exacerbated the cyclicality of the business. A second objective was to reduce dependence on small accounts whose positions in the market place were marginal from the standpoints of credit and potential growth. In the yarn market the strategy was to find new applications that would appeal to manufacturers with high poundage or high square-foot requirements. New customers had to be found beyond manufacturers of furniture, automobile seat covers, and grille cloth. Applications that would not generate significant volume were considered unattractive because of their low margins. In the industrial-fabric market, the strategy was to provide improved material and new applications in volume for customers who were using or were likely to switch to superior synthetic fabrics in some of their present or new end products. Examples of such products were specialty bagging (sacks, bales, bags), swimming-pool covers, tenting, tarpaulins, and industrial product wraps. Management estimated that much of the domestic market was concentrated in 100 large potential accounts. Major marketing efforts were to be undertaken at first, however, with only the largest potential customers with high-volume applications. This strategy required a very high investment in weaving and coating equipment. Madison was obliged to take on heavy debt to enter this capital-intensive business. Sales and Sales Management Activities The job of the Madison sales reps was multifaceted. First, they were expected to service Madison accounts and obtain orders for all Madison product lines. By virtue of personal acceptability and technical competence, they were expected to assist customers in determining appropriate inventory levels, to monitor and correct possible problems regarding the quality of delivered products, to monitor and correct Madison’s delivery service, to handle complaints, and to serve generally as on-the-spot trouble-shooters. Page 4 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -5- UVA-M-0425 Second, the sales reps were expected to increase the proportion of business that Madison was obtaining from each account. Because most larger companies, particularly those purchasing carpet fiber, preferred to purchase from several sources, it was important that the sales reps penetrate past the customer’s purchasing office and become influential with all important decision makers within the customer’s operation. Third, the sales reps were expected to work closely with the product-development managers to seek new applications for existing products and extensions of the product line and to introduce new products to present and potential customers. In effect, between working with accounts and developing a close liaison with the product-development managers, a good part of the sales reps’ jobs was to manage relations between the Madison plant and its customers. Fourth—and increasingly important given the company’s efforts to reduce its dependence on carpet-manufacturing customers—the sales reps were expected to prospect for new accounts for yarns and fabrics. They were responsible for generating leads by observing, listening, reviewing such sources as the Thomas Register, and following up inquires forwarded from the customerservice manager. Thus, sales reps were required to call upon many different kinds of customers, ranging from large carpet manufacturers to small grille-cloth weavers to industrial-packaging firms. They could experience considerable difficulty in determining who and where the likely prospects were for a number of quite different product applications. Finally, the company’s marketing strategy was still in the process of evolving, forcing sales reps to tailor their activities by industry and by geographic area. Late in 1998, the sales organization had been reduced from two regional managers supervising 14 Madison sales reps and four commission agents to a single sales manager supervising 12 sales reps. This action had been taken after a detailed study of the sales reps’ activities had revealed that the sales force was underutilized. As a consequence, each territory had been studied to determine the optimum number of calls per day from a well-planned itinerary. Each current account was analyzed to determine how many calls per year were required to cover the desired amount of service and selling time. A similar procedure was undertaken with respect to current and potential prospects. This analysis produced the current territory assignments and a concomitant increase in the number of required and actual sales calls per week. As Exhibit 1 shows, the dollar sales for 1999 were similar among the sales territories, except for the Atlanta territory with its large concentration of carpet manufacturers. The current sales reps had been with Madison from four to twenty years. They had been hired as experienced sales reps and their ages ranged from 33–52. The company had no formal training program beyond a two-week tour in the plant to gather technical knowledge and a twoweek tour in the field with an experienced sales rep to “learn the ropes.” In 1999, in recognition of the sales manager’s increased span of control, three control forms were instituted to monitor the field activities of the sales force. The first was a weekly itinerary Page 5 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -6- UVA-M-0425 submitted by the sales rep to the sales manager. It listed the sales rep’s planned calls by account and by day. It was faxed to the sales manager on Friday to cover the following week. The second form was a trip report, which the sales rep filled out after each call. The sales rep listed the account’s name, persons contacted, purpose of the call, results of the call, whatever marketing intelligence he or she had gathered, and whatever follow-up action should be taken by the sales rep or by the Madison plant. For a serious complaint, the sales rep was required to fill out a complaint report in seven copies, which were routed to various departments within Madison, depending upon the nature of the complaint. This form was also used to request price adjustments and to advise other Madison departments of problems with service, billing, pricing, delivery, and quality control. The sales manager tried to maintain personal contact with each of the 12 sales reps by telephone at least once a week. His objective was to spend two and one-half to three days a week in the field working with the sales reps and calling on customers with them. This schedule permitted him to work in the field with each sales rep for two or three days in each quarter. An annual sales meeting, usually held in February, brought all the marketing and sales personnel together in Baltimore. This meeting, a combination of social and business activities, was the company’s major opportunity to inform the sales force of technical developments in the Madison product line and to review marketing plans. The sales manager conducted a formal performance review with each sales rep at the end of the year. The review took place either in the field or during a sales rep’s visit to the Madison plant. The vehicle for performance appraisal was a two-page sheet that provided space for the sales manager to write a subjective appraisal and developmental action plan in each of six areas: technical knowledge, quality of work, quantity of work, initiative, relations with Madison personnel, and office procedures. These criteria were used throughout the company, and the form was standard for all departments and for all nonmanagerial employees. The current compensation plan for the sales force paid a straight salary that, in 1999, averaged $62,000, plus a year-end bonus ranging from $5,000 to $7,500 per person. The size of the bonus depended on the collective subjective judgments of the sales manager, the marketing vice president, and the president. Seldom, according to the sales manager, was the size of the bonus related directly to sales dollars produced. In addition to earnings, the sales rep received all normal fringe benefits, plus a company car. He or she was reimbursed for all normal business expenses after submitting a monthly expense report. The Compensation Issues The first problem that senior executives had to deal with was the appropriate amount of compensation. Madison executives estimated that the average sales rep’s earnings in the industry were approximately $75,000 a year (including company car), although sales reps for two of Madison’s larger competitors probably averaged about $90,000 a year. Earnings for the top sales reps in the industry appeared to be earning in the neighborhood of $100,000 to $125,000 a year. Page 6 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -7- UVA-M-0425 The sales manager recognized that Madison sales reps’ earnings were close to the industry average. But he argued that, because it was a small company relative to its major competitors, Madison should pay more than average compensation in order to attract and keep the best possible sales reps. The controller argued that, because turnover was almost nonexistent, there was no need to pay Madison sales reps more than they were already getting. The second issue was the method of compensation. Firms in the industry exhibited considerable variety in methods of compensating their sales reps. Two of the large firms paid straight salary only. Some smaller companies used commissioned agents who paid their own expenses from a commission rate of 1½ percent of their sales. Most of Madison’s competitors, however, used a salary system with some form of bonus payment. Each of these methods had its adherents within Madison. The president indicated that the decision of how the sales reps were to be compensated would be left up to the sales manager, the marketing vice president, and the company controller. He placed two constraints on their decision, however: (1) no sales rep doing a good job should suffer financially from a change in the pay plan; and (2) if a bonus system was instituted, no sales rep could earn more than 50 percent of his or her salary in bonus, because the Madison managerial bonus plan had the same limit. Accordingly, the marketing vice president, the sales manager, and the controller met to discuss the options they had studied over the past six months. These options are described below. Straight salary The controller advocated paying sales reps a straight salary and basing future salary adjustments on past performance. He argued that a straight salary would give managers tight control over the sales reps’ order taking and account servicing. Because much of the sales reps’ success depended upon their ability to bring the internal resources of the company to bear on the solution of customer problems, the “credit” for the sale belonged to everyone in the Madison organization. Furthermore, much of their business was “handed to them on a silver platter” and was not a direct consequence of their individual initiative. The sales manager disagreed. He maintained that straight salary gave sales reps no incentive to develop new business or to increase business with current customers, and that these objectives were the real focus of their efforts. He added that both these activities were critical to the success of the company’s strategic shift in product and customer emphasis. Furthermore, he maintained that salary adjustments would be determined by the same subjective evaluations that made Madison executives uncomfortable in determining bonuses under the current system. Continuation of current plan The major argument for continuing the present plan was based upon the marketing vice president’s idea that “the devil you know is better than the devil you don’t.” He maintained that the Page 7 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -8- UVA-M-0425 current system had the advantages of familiarity and control over unexpected events. He recognized, however, that the current plan was favored neither by the sales reps, who had been complaining about the subjectivity of the bonus determination, nor by the sales manager, who was particularly uncomfortable when explaining to the sales reps the basis for these subjective judgments. Straight commission Straight commission was the plan favored by the sales reps. The commission rate under discussion was 0.6 percent of sales, paid monthly. The sales reps argued that they would be inclined to work harder if they were treated “as if they were in business for themselves,” and that their efforts to maximize their own incomes would maximize the achievement of company objectives. The controller pointed out to the sales manager and the marketing vice president that straight commission meant that, as the firm grew and increased its efficiency, it could never improve its ratio of sales to cost of selling. The marketing vice president expressed the opinion that he did not want the sales reps “in business for themselves.” He wanted them “working for Madison.” The sales manager sympathized with both of these reservations, but he thought that straight commission might make his managing job easier because he would have to do less “booting them in the tail.” Salary plus annual bonus based on product-line sales The sales manager proposed an annual bonus based on product-line sales “over quota.” He favored establishing quotas for each sales rep for each major product line—carpet fiber, yarn, and industrial fabric. At 100 percent of quota for each product, sales reps would receive no bonuses, but for each 3 percent in excess of quota for each product line, a sales rep would receive a bonus of 1 percent of salary. Thus, if a sales rep exceeded his or her personal quota for each of the three product lines by 9 percent, the annual bonus would be 3% + 3% + 3% or 9% of salary. The maximum bonus would be 50 percent of salary. The annual bonus would be supplemented by a one-time award given for each new account to equal one-tenth of 1 percent of the new account’s first-year sales, with a maximum payment of $600 per account. This payment would be made as soon as possible after the anniversary date of the new account’s first order. The controller was less than enthusiastic about his plan, maintaining that the quotas might be set too low, resulting in overpayment to the sales reps. He also wondered about the effects of windfall sales. The marketing vice president wanted to know how the sales manager planned to make the quotas fair, because sales in the past had sometimes been limited by plant capacity. Salary plus quarterly bonus based on “capitalized sales expense” One of the product managers had passed along to the marketing vice president an article describing the “capitalized sales expense” approach to compensation. This method required that managers first determine the sales expenses that they were willing to incur. This expense was expressed as a percentage of sales. The salary and controllable expenses incurred by a sales rep Page 8 of 10 DardenBusinessPublishing:216471 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions. -9- UVA-M-0425 were then divided by this percentage. The resulting amount, called a “bogey,” was to be used as a dollar sales quota. The sales rep would receive a bonus for sales in excess of the bogey. The bonus would be set at a fixed percentage of these excess dollar sales, at a rate below the figure for the desired sales expenses, expressed as a percentage of sales. No bonus could exceed 50 percent of a sales rep’s salary. The marketing vice president was intrigued enough by this idea to calculate some percentages illustrating it. He set desired sales expenses at 1 percent of sales and set the bonus at 0.5 percent of sales in excess of bogey. He then figured the quarterly bonus for a sales rep who earned a salary of $18,000 for the three-month period, made $2,700,000 in sales, and incurred $6,000 in expenses during the same period. 3 month’s salary + 3 month’s controllable territory expenses = Bogey 0.01 (3 month’s sales - Bogey)  0.005 = Bonus $18,000 + $6,000 = $2,400,000 = Bogey 0.01 $2,700,000 - $2,400,000 = $300,000 (sales in excess of bogey) $300,000  0.005 = $1,500 (bonus for the quarter) The marketing vice president felt that this system would appear too complicated to the sales force, although he recognized that the bogey derived from capitalizing sales expense seemed less arbitrary than a quota “plucked out of the air.” The controller felt that the system would be too complicated to administer, although he realized that the cost of sales would decline as the sales reps exceeded their bogeys. The sales manager noted that this plan neither emphasized sales by product line, nor motivated sales reps to open new accounts. But he acknowledged that the system would encourage sales reps to keep their expenses down, because spending less than budget would lower their bogeys. Page 9 of 10 This document is authorized for use only by Rafael Soltero at Florida International University. Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permis -10- UVA-M-0425 Exhibit 1 MADISON FIBER CORPORATION Individual Territory Results and Earnings in 1999 Territory Number of Actual and Potential Accounts1 Carpet Backing ($ mm) Yarn ($mm) Fabric ($mm) Total ($mm) Salary Bonus Atlanta 42 $32.3 $2.4 $0.0 $34.7 $58,000 $5,200 Baltimore 40 $10.6 $2.3 $0.0 $12.9 $49,000 $4,000 Boston 38 $2.4 $8.5 $0.3 $11.1 $51,000 $4,200 Chicago 48 $7.3 $4.1 $0.8 $12.2 $52,000 $6,000 Cleveland 41 $4.5 $6.8 $0.4 $11.7 $47,000 $5,500 Detroit 50 $3.6 $8.5 $0.5 $12.6 $48,000 $5,000 Houston 44 $11.3 $0.9 $0.3 $12.4 $44,000 $5,700 Los Angeles 45 $6.0 $4.7 $0.6 $11.4 $54,000 $5,500 New York 44 $12.2 $0.4 $0.1 $12.7 $57,000 $4,700 Philadelphia 36 $11.5 $0.4 $0.0 $11.9 $47,000 $4,200 Pittsburgh 42 $4.7 $6.4 $0.3 $11.4 $45,000 $4,200 San Francisco 42 $8.5 $3.7 $0.1 $12.3 $48,000 $5,800 TOTAL 512 $89.70 $38.30 $2.60 $167.3 $750,000 $75,000 ______________________ 1 Potential accounts referred to identified prospects that the sales reps intended to call upon or had been called upon. 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Explanation & Answer

Attached.

Introduction

A. Topic/focus of the essay
B. Thesis Statement

Body

First paragraph description

A. Summary of first piece of supporting evidence/information
B. Summary of second piece of supporting evidence/information

Second paragraph description

A. Summary of first piece of supporting evidence/information
B. Summary of second piece of supporting evidence/information

Third paragraph description

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B. Summary of second piece of supporting evidence/information

Conclusion

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B. Concluding remarks


Running Head: Madison Fiber Corporation Sales Compensation System

Title: Madison Fiber Corporation Sales Compensation System
Name of Student:
Institution:

Madison Fiber Corporation Sales Compensation System
Introduction
I am extremely grateful for considering my expertise to add value to your company in its
establishment of a competitive compensation system. As an expert in the field, I will objectively
analyze the different sales compensation plans, outlining the pros and cons of each and will thereafter
make a recommendation on the best option. I will also offer insights on the amount of compensation
that a Madison salesperson should make in the new scheme. Finally, I will also give insights on other
elements of sales management system that could be fine-tuned by Madison Fiber Corporation.
Statement of the Problem
Madison Fiber Corporation has been in existence since 195...


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