Compensation (& Quotas)

Compensation (& Quotas)

Compensation (& Quotas) • Quotas • Payout Plans • Mary Kay Cosmetics Case

Quotas: What are you willing to do?

IDC (International Data Corporation) a publisher of market research for the technology industry Fixed payout for meeting quota (sell $5million; get $100,000) 1.5% kicker for every 1% over quota… so if you get 120% of quota you get 130% of payout- $6million=>$130,000 From Sales & Marketing Mgmt, Sept. 1997 Quotas: An Example

Quotas- Why? • To help motivate salespeople • To direct salespeople where to put their efforts • To provide standards for performance evaluation • management by exception

Quota Types • Sales (dollars, units, points) • Profit (gross margin, contribution margin) • Activity (inputs: calls, displays, meetings,etc)

When are they effective? • Goal Theory: proposes that difficult goals (if accepted) will lead to higher performance than lower goals or no goals such as “do your best” • Classic study: high quotas put in place for everyone; due to complaints the company relaxed the quotas in a few districts. The districts with high quotas outsold those with lower quotas

Administering Quotas • Past sales • forecasted sales • sales potential

Quotas- advantages? • Everyone knows their quotas in advance • Easy to cascade corporate sales goals through organization • Can capture some territory differences • Easy to understand payouts- although not always easy to understand how the quota itself is established

Quotas-disadvantages? • Difficult to set accurately (especially for new products) • Payout is hard to predict- exceed the budget or turnover • difficult to adapt to changes through the period (new products, territory changes, new reps, etc) • requires good information systems to properly credit sales

Quotas- disadvantages? • Reps who earn less than their goal often complain about the fairness of the setting procedures • Good-performing reps may “coast” if future quotas are dependent on past ones • Reps who have no chance of meeting goal may cease most of their efforts

Quotas- when for sure “not”? • When teamwork is important- individual quotas might be a problem- especially it they’re done on a relative basis • Long selling cycle • rough on new reps • if also a high dollar amount then you run into extremes (high/low)

Relative Performance Plans • may or may not have quotas • measure performance relative to a benchmark: “average performer” • relative payouts are set in advance: • “top performer gets 2.5 times the average” • “worst performer gets 0” • “average gets average payout or pre-determined amount”

Drawbacks to Relative Performance Plans • may not work in team-selling environments • no goal - motivational issues • rep doesn’t know in advance what their payout will be since they don’t know their rank • rank must take into account territory difficulty (unless based on % of quota- td already accounted for)

Calculate the annual income of: • (a) a consultant who sells an average of $150 (at wholesale value) of product per month; • Retail Price= $300; therefore monthly income of $150 for the consultant • Annual Income= $1800

Calculate the annual income of: • (b) a VIP team leader with 15 recruits who averages monthly personal sales of $650 and team sales of $3200 (assume she receives a 12% commission on recruits' sales); • Retail Price=$1300; therefore monthly income of $650 for personal sales • Team Sales: 12% of 3200= $384 • Annual Income=($650+$384) x 12=$12,408

Calculate the annual income of: • (c) a director with 50 active unit members, who averages monthly personal sales of $500, personal recruits' sales of $5000, and total unit sales of $9500. Assume she recruits three new consultants every three months, which entitles her to a recruiting bonus of $200 per quarter. Apply a 12% commission on recruits' sales and an 11% commission to total unit sales. Also add in a monthly production bonus of $700. • Monthly income from personal sales: $500 • Monthly income from direct recruits: 12% of 5000=$600 • Monthly income from total unit: 11% of 9500=$1045 • Monthly Bonus: $700 • Annual Income= $800 (recruiting bonus) +12 *(2845)=$34,940

Mary Kay Cosmetics • Based on these calculations, what components of the financial incentives program appear to be the primary motivators for the sales force? • Describe a typical VIP Consultant in terms of demographics income management responsibilities

Mary Kay Cosmetics • Recommend a set of changes to the VIP car program that will improve overall sales force effectiveness at Mary Kay. Consider the motivational risks and cost effectiveness of your proposals as well as how they could be implemented. Be as specific as possible.

Summary • Quotas appear to have strong motivational value if well implemented • They are however difficult to implement • Need to trade-off the administrative issues and potential payout problems with the motivational gains

Compensation (& Quotas)