Olympia Machine Company, Inc. is an industrial equipment supplier. The management team is discussing the company's approach of how to compensate the sales staff. Different suggestions have been made by various executives of the company to come up with an alternative to the current approach of straight salary plus expenses. As each option has a different implication for the strategy, general organization, control system, and sales management requirements, each option has to be carefully evaluated. The case study discusses issues and analytics pertaining to themes such as strategy and organization alignment, strategy implementation, cross-function incentives as well as sales management.
Frank V. Cespedes; Benson P. Shapiro
Harvard Business Review (708490-PDF-ENG)
February 26, 2008
Case questions answered:
- What are the possible limitations that the current straight salary plan of Olympia Machine Company, Inc. might impose on selling effort?
- What are the implications of the three compensation alternatives?
- Can you imagine additional alternatives that would be appropriate?
- What should the Olympia Machine Company, Inc.'s executives do?
- How should the changes be communicated?
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Olympia Machine Company, Inc. Case Answers
What are the possible limitations that the current straight salary plan of Olympia Machine Company, Inc. might impose on selling effort?
Olympia Machine Company, Inc. has chosen a straight salary compensation plan, which does not involve any form, obviously, of incentive payment. Salespeople are simply paid a monthly rate, which is based upon four primary criteria (p. 6). In 2006, the company employed eight salespeople, which received a fixed salary of $80.063 p.a. (per person) on average, showing a standard deviation of $21.991. The total salary paid was $640,500.
On the one hand, such a straight salary compensation plan offers a number of advantages, such as being simple to understand and administer, providing sales reps with predictable income, giving Olympia Machine Company, Inc. management flexibility in rearranging territories, reassigning accounts, and changing salesperson priorities (e.g. toward non-sales tasks).
However, the limitations shown below overweigh the aforementioned advantages:
- Firstly, the current compensation plan demonstrates high fixed-selling expenses regardless of the volume of sales. This becomes especially problematic when revenue production is down, thereby raising the cost of sales.
- Secondly, performance evaluations and subsequently sales increases are subject to subjectivity and require extensive supervision of sales personnel.
- Thirdly, sales personnel may exert little or no extra effort in making sales as no incentive for improving one’s performance is being provided.
- Fourthly, sales personnel for Olympia Machine Company, Inc. do not employ a proper balance between capital equipment and other sales and tend to prefer making “quick-wins”.
- Fifthly, the proper mix of products may not be marketed because salespeople may focus on types of sales and do not consider the gross margin of products sold.
- Sixthly, territory plans are not being optimized in regard to routing, and account coverage and comparability between territories, in general, are not given.
- Seventhly, a straight salary compensation plan may impede an organization’s ability to attract top-notch salespeople as it generally appeals to security-oriented people rather than achievement-oriented ones.
- Eighthly and lastly, top performers are not properly differentiated from underperformers; indeed, top performers subsidize the pay of poor performers.
What are the implications of the three compensation alternatives?
The first proposal suggests a compensation plan for Olympia Machine Company, Inc. consisting of salary and bonus or penalty points for various selling activities. According to this plan, sales representatives are…
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