Caselet 1: Adjusting Your Compensation Plan to Motivate Your Sales Representatives
Pelican Pharmaceutical Company is having difficulty retaining quality, experienced salespeople. The problem started three years ago when the patent for the firm’s most popular drug expired, and other low-cost drug producers began manufacturing and selling similar drugs under generic names. Pelican has a board of directors that is fiscally conservative and only believes in rewarding sales performance based on profitability. So, as the firm’s sales slumped, so did the incomes of Pelican’s sales representatives and sales managers. Frank Killey was hired last year as the new director of sales at Pelican. Frank has been struggling with motivation and reward issues for a sales force that is again failing to make its yearly sales quota. Pelican still has numerous viable drugs to sell but does not have a “blockbuster” drug in its research pipeline. Last week, one of Frank’s senior sales managers came into his office and resigned, telling Frank that he planned to take early retirement because the industry is changing, and he had had enough. Pelican provides both its sales representatives and sales managers with modest salaries, company cars, and full benefits, which are some of the best in the industry. The company pays commissions based on salespeople surpassing their previous year’s sales totals. An escalating reward system kicks in once a sales representative achieves 80 percent of his or her sales quota. There are also special sales contests related to selling the company’s most profitable drugs. The rewards for these contests usually consist of trips or merchandise. However, the average salesperson at Pelican is only achieving 75 percent of his or her sales quota, which means the person earns no commission. Those who do earn bonuses are usually only a few percentage points over quota, so their commission checks are marginal. The sales quotas were set by Pelican’s board of directors and are based on the company’s overall operations overhead and the return the company’s shareholders expect. Frank is very concerned about the downward spiral he is seeing in his sales force. He thinks changing the commission structure would solve the problem. His goal is to kick off Pelican’s upcoming annual sales meeting with a presentation outlining the company’s new and improved commission structure. To implement the new commission plan, he will have to make a proposal to the board of directors to lower the quotas reps must achieve by 10 percent. That way, at least 50 percent of the sales representatives would have an opportunity to achieve and exceed their quotas. He also plans to highlight the company’s existing total rewards package, including Pelican’s generous company-car usage policy and valuable benefits package.
Questions
1. What problems do you anticipate Frank will run into when he presents his revised commission structure plan to Pelican’s board of directors?
2. If Pelican were a low-cost, generic pharmaceutical company, how would you as a sales manager reward and motivate sales representatives?
3. What other motivational tools could Frank have used to retain and motivate employees other than adjusting the sales quota downward?
4. Identify other areas within the company that will be affected if Frank’s plan is approved by the board of directors.
5. Do you feel the company should have adjusted its commission structure before the patent for its best-selling drug expired? Is it fair to penalize the sales force with lower commissions for an outside competitive factor they cannot control? Explain your answer.