Sales Management: Compensation Plan for Madison Fiber Corporation

The sales force pay model was being changed, according to senior management of Madison Fiber Corporation. The optimal strategy for the company’s and the sales force’s mutual advantage, however, was disputed by all parties involved. As a consultant, it is my responsibility to serve as an objective outside expert who can advise the business on the best course of action based on the requirements of both the business and the sales force. The objectives of this plan are to develop a plan that considers the overall industry and the place of Madison Fiber Corporation in the yarn, carpet, and synthetic fibers market. In addition, the plan aims to consider the cost of sales and examine different options then select multiple combinations that go hand in hand with Madison company objectives.

2. Problem Statement

One of America’s largest producers of yarn, carpet, and synthetic fibers, Madison Fiber Corporation began to face doubts and questions that were continuously bugging the company concerning the sales compensation program for its entire sales force. The sales force is directly involved in the success of the company as the company is a producer of commodities that are sold through retailers to the American market. Due to this vital role, the senior management of the company has found it necessary to change the compensation plan for its sales team, therefore, motivating it to push the company success rate to an even higher number.

The original plan compensated the sales force for less than the competitors of the company offered their sales representatives. The sales force was also compensated through a number of compensation options which characterized both salary and commissions. In addition, it is also of great concern that the senior company management and the sales force cannot agree on the best option since they are all stakeholders of the new plan.

3. Key Alternatives of the new compensation plan

The first alternative, which was the most preferred alternative by the sales reps was the straight commission option. This would give the sales force a commission of 0.6% of all their total sales, and this would be paid monthly to the employees. The employees felt that this method was effective because it would encourage them to work harder thus helping the company to reach its annual goals and satisfying their own financial needs as well. The sales manager, on the other hand, proposed that the sales force be compensated through a salary combined with the annual bonus based on the sales of different product lines over quota. The sales manager’s method would only fetch the sales force a 1% bonus if they sold 3% above the quota for yarn, carpet, and synthetic fibers. However, this method was not preferable to the senior management because of the risk of quota targets being set too low and thus causing the sales force to be overcompensated. There was also another suggestion to compensate the sales force through a salary as well as a quarterly bonus based on capital sales expense. This would be beneficial to the company as it maintains the overall goal of the company to increase sales and profitability while still appreciating the role played by the sales team. The bonus would only be given based on the sales person’s ability to remain under the company’s sales expenses while still bringing in sales.

There were also sales representatives who were for remaining with the current plan. However, the current plan is not in line with the strategy of the corporation and encourages giving bonuses on subjective evaluations and not sales results.

4. Decision Criteria

The plan suggests using an approach that is comprehensive, inclusive, and one that diligently assesses the reviewed performance of all the payment options that the company considers logical. It then identifies the need for both the sales force and the company and recommends the best plan for the company

The decision criteria for this plan include:

• Cost of sales

• Profitability of the compensation system, and

• Compatibility with the corporation’s objectives

5. Analysis

In the first option which is the Straight Salary option, the sales force is expected to get a salary by virtue of being an employed sales person. On average, the salary of sales people is about $50,000 per year. This option is advantageous to the company because after paying out the salaries, the company will not have another liability with regard to compensating the sales force. However, this option is not compatible with the corporation’s objectives and does not in any way help to advance the profitability of the company. In the event that the sales expenses exceed the salaries of the sales force, this method is destructive to the company’s financial goals. This is because the sales reps could be paid more than they actually bring in and this beats the purpose of having sales representatives. In addition, the method could also encourage complacency within the sales force because it assures them of compensation whether or not they have achieved their sales goals. This makes this option the worst for both the company and the sales force as the method is not progressive.

Continuing with the current plan is also a better option than the straight salary one. The current plan allows the sales reps to an average of $62,000 annually. This salary is also paired with an annual bonus ranging between $5,000 and $7,000 per person based on the subjective judgments of the top management in the firm. However, this value is lower than that of other companies that compete with Madison Fiber Corporation which averages $90,000 a year. This is permissible because the company is a little smaller in capacity than its competitors. The sales reps also got all normal benefits, a company car, and reimbursements for all expenses incurred during normal business operations as is documented in their monthly express reports. While this option is one of the best, it encourages a farming selling behavior which does not assure the company of progressiveness in the future. In addition, this option of the compensation plan is also not in line with the corporation’s strategies and goals because it does not encourage the sales force to do more and make a larger number of sales. Another disadvantage is that the annual bonuses given per person are decided on subjective evaluations and not sales results sometimes making the biggest performers earn smaller bonuses than they actually should.

The third option, the straight commission option, is one of the best options for this compensation plan. This option motivates the sales force to make the highest number of sales possible thus making the company’s profitability of key importance in their job. By earning 0.6% of total sales, employees could earn as much as they can depending on the number of sales they make. It also encourages competition between the sales reps themselves furthering the agenda of the company by increasing sales. However, since the option has no base salary, and a limited downside or upside risk, it might encourage sales reps who are less motivated to quit thus affecting the overall sales of the company. The disadvantage, however, is that teamwork amongst the sales force would completely disappear because all representatives would get competitive so as to earn more. In addition, the sales rep would begin to do anything so as to achieve their goals without considering whether their methods are ethical or not.

The sales manager suggested a salary plus an annual bonus based on sales from the three product lines. This would eradicate issues brought about by competitive sales as well as quitting but fails to consider the payment of sales reps who do not achieve their quota. Also, this option gives the sales reps a power to make so much more than their actual returns reflect the company’s overall sales. This plan would entitle the sales force to up to $90,000 annually inclusive of the bonus given that the salary averages $55,000 annually. The manager also failed to highlight the target quotas for each product line meaning the company might have to spend more in compensating their sales force than their returns imply.

Finally, the final option of a salary as well as a quarterly bonus based on the capitalized sales expense is also yet another very good idea which works in tandem with the corporation’s strategies. Other than overcoming all the challenges of the other four options, this method is excellent for employee management. The only downside is that the plan is tough to administer and sales people mostly do not understand how it works. This method is thus the best because it has the prop of rewarding the sales force while keeping the company’s expenses as low as possible for maximum profitability.

6. Conclusion

This compensation plan offers the senior management of Madison Fiber an analysis of the compensation plan options that the company has not been able to select from and recommends the plan that entails a salary and a quarterly bonus based on the capital sales expense.

7. Recommendations

As an independent third party and unbiased expert, I recommend the fifth option of salary and a quarterly bonus based on the capital sales expense for Madison Fiber Corporation. This option generously rewards hard working sales reps while keeping the company’s sales expenses as low as possible.