US-based Loctite is the market leader in adhesives and sealants business, with Mexico and Permatex as subsidiaries and business operations in Mexico. The net earnings growth has been slowed down since 1987 amid economic downturn, to achieve greater growth, the management control system is being tailored to local environment to better align the behavior of employees with the objectives and strategies of the organization. Performance-based compensation system covers result controls that provide incentives to boost sales and also action controls, particularly behavioral constraints in this case restrict employees’ actions.
Talent Retainment - Due ...view middle of the document...
The flaws in compensation system may partly contribute to the breakdown of the territorial system as salespeople do not get punishment for their violation. When all salespeople go to the areas with more big companies, leaving no sales effort put into other areas that have fewer but still have prospects, in long run, customer pool may diminish. Also, the manpower is not put into full use in this case, lowering the overall efficiency of the company.
Pricing Authority – Prices are fixed by Jose and salespeople have no pricing authority and cannot take into account clients’ needs. Given numerous aggressive competitors, it becomes difficult to capture and retain clients. Consequently, potential profitable deals may be lost and in long run, client base can shrink significantly since the switching cost for customers can be low.
As Jose suggested, salespeople are the greatest asset for the company, and so, talent retainment is the most urgent in order to remain as a dominant market leader with 85% market share. Also, internal competition, which adversely affects sales and employees’ morale, can be eliminated. While boosting sales, commissions should be given appropriately since the current commission-sales ratio is high.
Suggestions for Improvements
Several changes could be made to performance-dependent compensation. First, to retain talents while reducing financial burden, the base pay could be lowered but higher than their competitors’ offer. Loctite’s recent salary increases had been far above inflation and so the company may lower it to a level that is just above their competitors. Also, unrealistic sales targets should be adjusted according to the current situations to make them challenging but motivational.
Second, bounded by law, the profit sharing cannot be lower than 10%. A further increase will significantly increase financial burden and so non-monetary benefits shall be introduced more widely in the company like family vacations and medical benefits but not just the few top OEM and MRO salespeople.
Third, the regular salary increase should be objective based on SOP and sales goals and profit margins and should be reversible, which means salaries could be lowered in cases of worsened performance. However, employees should be provided with support by having annual reviews with their supervisors who shall help analyze problems and help improve performance.
Forth, to particularly address the...