American Linen is a firm that has multiple salespersons. In 2008, it changed the

Question

American Linen is a firm that has multiple salespersons. In 2008, it changed the compensation method for its sales force, moving from a system of fixed wages to one of base wage plus commission. As a result, American Linen's total revenue from sales increased by almost 30%, and the average compensation received by a salesperson also increased substantially. The firm is currently contemplating the introduction of comparative performance evaluation in their compensation. One alternative is to determine the variable part of each salesperson's compensation by comparing his or her performance to the average performance of the firm's sales force. The second alternative is similar, except that it uses the average performance of the sales force at rival firms.

A. Explain why the change from a system of fixed wages to one of base wage plus commission can lead to an increase in sales revenue. (Be brief and precise: no more than 5-8 lines.)

B. Explain how the introduction of comparative evaluation can reduce the firm's cost of compensating its sales force. Which alternative would you favor? Why? (Be brief and precise: no more than 8 lines.)

Explanation / Answer

(A) The fixed wages system provides little short-term incentive for the sales team; they do have performance reviews, but raises are not guaranteed, and they are often smaller than commissions. Raises take longer to add up. With the incentives, employees can justify extra time that could have been spent working a second job, or small gifts and cards, which might involve personal cost. The incentives would make up for these extra efforts to bring in my business. (B) With a comparative evaluation, a fixed amount of money could be set aside for the commissions. This would cap the variable part of the entire sales force's compensation. Often, people are motivated by the idea of excelling and by the idea of an award more than the reward itself, so this method could save the company money without lowering sales revenue. Also, the lowerer performers could get a very small commission, or even no commission and the higher performers could get the same commission as they did last year, which would also result in a savings. Competeing against the other company is always better than in-fighting.

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