Caselet 2: Which Is Better? A Market Share–Based Incentive System or a Revenue-Based Incentive System?
Phil Lehman, a very successful salesperson, started working for Lextron Corporation right out of college. Phil has been with Lextron, a major manufacturer of sterilized medical equipment, for over 10 years. During his first 10 years with the company, he won numerous sales awards, was a sales dollar leader in most product categories, and never missed his sales quota, which increased by approximately 10 percent each year. Lextron’s customers are major hospitals and medical centers across the country. The company currently has a 40 percent market share in the United States, which is double its nearest competitor. Territories are divided up by metropolitan areas, and commissions are paid based on sales volume. Phil had been working in the Atlanta, Georgia, territory his entire career. Two years ago Phil’s wife, Marcia, who is a physician, had an opportunity to take a new position in Milwaukee, Wisconsin. The position would have enabled her to do more research, which is one of her passions. Coupled with this offer was the fact that both Phil and Marcia are from the Milwaukee area. Thus, Phil’s company agreed to transfer him to the Milwaukee territory, which had recently opened up. The move back to Milwaukee started out great. Phil’s wife enjoyed her new job, and he worked hard making new contacts in the medical community. He opened up six new major accounts in his first year and another three in his second year. However, Phil was running out of new account prospects. He figured he had doubled his market share since he started working in Milwaukee, and he speculated that his products were in 80 percent of the hospitals and clinics within his territory. Despite his hard work, he was making less money in commissions and not winning sales contests like he did when he was in Atlanta. Mark Green, a regional sales manager for Lextron, is Phil’s direct supervisor. Mark has agreed to visit Phil in his territory to discuss a pressing issue Phil has not yet disclosed to him. At lunch Phil asks Mark several questions about his sales performance over the past two years. Mark praises Phil for doing an excellent job and encourages him to keep up the good work. Phil then asks Mark why he is not being compensated for his efforts. Mark is puzzled. He tells Phil he is paid on a commission like every other sales representative in the country. Phil then lays out the compensation he received in Atlanta for capturing just 40 percent of the market and the compensation he receives now in Milwaukee for capturing 80 percent of the market—double what he had in Atlanta.
Questions
1. How do you think Mark Green should react to Phil’s argument about market share and compensation? (Remember, he just told Phil he was doing an excellent job.)
2. Do you believe Phil has been fairly compensated since his move to Milwaukee? What other compensation programs could the company have put in place to avoid this situation?
3. Should Lextron Corporation consider changing its commission structure from one that is revenue-based to one that is market–share based? If so, how might this affect the firm’s other territories. Explain your answer.
4. How do you think the size and speed of growth in a metropolitan area like Atlanta affect commissioned salespeople with territories in areas such as this? What about commissioned salespeople with territories with shrinking population bases, such as Milwaukee?
5. Should the territory Phil was working in Atlanta have been split in two—to allow Lextron to capture more market share and keep the market share of different territories around the country and the compensation associated with on par with one another?
6. Should the existing salesperson in a territory to be split receive any additional compensation of future lost wages because the territory is going to be smaller? Explain your answer.