Thank you for allowing us the opportunity to work with your company. As requested, we have examined HF76’s sales functions and critically evaluated the current sales incentive as well as the newly proposed plan as you requested. While I understand that the newly proposed system is to gear up profitability towards HF76’s targets, I believe that there are still some issues that are yet to be resolved. The unresolved issues are;
• Has the new system actually resolved the problem of sales forecast?
• How can this new incentive system motivate salespersons in the negative and low margin products?
• What about the sales assistants, how does the new system motivate them in line with the ...view middle of the document...
Proposed New Incentive Plan
HF76’s new incentive plan attempts to re-arrange the sales goals and fix problems from the old incentive plan. The new system attempts to “open new markets, to sell in more profitable markets, and to give…more lead time for better operational planning.” The plan has three main features of a commission based on product gross margin but not paid until gross margin exceeds 70% of forecast; a 5% extra bonus based on forecast accuracy and finally a subjective bonus based on individual management-by-objective (MBO) targets.
The new system of incentive no doubt will address some of the issues raised especially as it relates to profitability and opening new market as commissions will be paid as a percentage of gross margins instead of sales, which will encourage salespersons to meet up targets. However, the units with low or negative gross margin will be at a loss if same parameter is used for them. Hence the problem of finding a more realistic incentive system for them since it is strategic for HF76 to continue selling these products.
The extra 5% of base salary if their total gross margins were within 10% of forecast will strongly motivate salespersons to disclose their best estimates of market prospects for accurate forecast. If salespersons annual gross margin forecast falls outside 90% to 110%, they will lose the 5% bonus.
However, there are some weaknesses in the new incentive system as well as some unresolved problems from the current incentive that are yet to be addressed.
Critical Issues in the New Plan
Apart from the issues raised previously about the newly proposed incentive system, as well as it being hard to implement and the complexity of the changes to be undertaken, the newly proposed plan focuses more on the company’s goal rather than individual staff problems. It may also not be liked by the salespersons as they are used to having an easy to calculate bonus system that was based on sales. The new incentive is somewhat complicated in arriving at what a salesperson would make from a sale of a product. A “commission based on product gross margins, but with no commissions paid until gross margins exceeded 70% of forecast” may defeat the aim of motivating salespersons to increase sales and better profitability especially as there is no certainty in what dollar amount they will be getting from each sale.
One other potential impediment to the new plan is the non-inclusion or improvement of the sales assistance bonus to motivate them to improve their work and provide better and more effective support to the salespersons. There was no plan to change or improve on the current bonus offered to the sales assistants in the new plan even though the current bonus package to them is nothing to write home about. It can also be noted from one of the sales assistant’s statement, “I had forgotten about...