3/2/991 Compensation (& Quotas)

2 zQuotas zPayout Plans zMary Kay Cosmetics Case

3 Quotas: What are you willing to do?

4 Quotas: An Example zIDC (International Data Corporation) a publisher of market research for the technology industry zFixed payout for meeting quota (sell $5million; get $100,000) z1.5% 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

5 Quotas- Why? zTo help motivate salespeople zTo direct salespeople where to put their efforts zTo provide standards for performance evaluation ymanagement by exception

6 Quota Types zSales (dollars, units, points) zProfit (gross margin, contribution margin) zActivity (inputs: calls, displays, meetings,etc)

7 When are they effective? zGoal Theory: proposes that difficult goals (if accepted) will lead to higher performance than lower goals or no goals such as “do your best” zClassic 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

8 Administering Quotas zPast sales zforecasted sales zsales potential

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

10 Quotas-disadvantages? zDifficult to set accurately (especially for new products) zPayout is hard to predict- exceed the budget or turnover zdifficult to adapt to changes through the period (new products, territory changes, new reps, etc) zrequires good information systems to properly credit sales

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

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

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

14 Drawbacks to Relative Performance Plans zmay not work in team-selling environments zno goal - motivational issues zrep doesn’t know in advance what their payout will be since they don’t know their rank zrank must take into account territory difficulty (unless based on % of quota- td already accounted for)

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

16 Calculate the annual income of: z (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); zRetail Price=$1300; therefore monthly income of $650 for personal sales zTeam Sales: 12% of 3200= $384 zAnnual Income=($650+$384) x 12=$12,408

17 Calculate the annual income of: z(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. zMonthly income from personal sales: $500 zMonthly income from direct recruits: 12% of 5000=$600 zMonthly income from total unit: 11% of 9500=$1045 zMonthly Bonus: $700 zAnnual Income= $800 (recruiting bonus) +12 *(2845)=$34,940

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

19 Mary Kay Cosmetics zRecommend 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.

20 Summary zQuotas appear to have strong motivational value if well implemented zThey are however difficult to implement zNeed to trade-off the administrative issues and potential payout problems with the motivational gains