Often times their is some connection between budgets and performance evaluation.
ID: 2448240 • Letter: O
Question
Often times their is some connection between budgets and performance evaluation. The budget tends to set a benchmark for expectations. Many compensation schemes tie some type of bonus to reaching and exceeding this benchmark. This linkage results in some interesting behavioral implications. Here is one example:
Bartlett Drugs makes generic prescription drugs. It relies on its sales personnel to market and sell its prodcuts widely to pharmacies, doctors and hospitals. While Bartlett has always been profitable, revenues have been stagnant over the last five years. In contrast, other generic companies have recorded significant revenue growth.
After careful investigation, Bartlett's CEO, Leslie Howard, concludes that an important reason for the lack of revenue growth is the way the incentive system is set up for the company's sales personnel, coupled with the role sales personnel play in the annual budgeting process. Currently, an average sales person receives a fixed annual salary of $40,000, and a bonus of $20,000 for meeting or exceeding an annual sales target of $400,000. A look at the records was enough for Leslie to realize that hardly any member of the sales team exceeded the target of $400,000 by much and many of them were just about meeting this target. The sales target was set each year in consultation with the sales team, and the target had not moved in the last five years.
It was clear to Leslie that the sales team was "low-balling" the target to be able to comfortable meet and qualify for the bonus. They also seemed to stop once the target was met. However, Leslie realized the sales personnel were in the best position to assess market trends and to help set realistic goals for the company. After consulting with experts on sales force compensation, Leslie has come up with the following four options:
Option 1: Remove the bonus for meeting the target and increase annual salary to $60,000.
Option 2: Set the target at a level that is 10 percent higher than what the sales team recommends. Implement a sales commission system whereby a salesperson earns 5 percent of the amount by which actual sales exceed 90% of the target.
Option 3: Set the target based on industry growth and keep the existing bonus system.
Option 4: Implement a tournament scheme wherein sales personnel are ranked into five performance-based groups, and vary the bonus across the groups.
Discuss the relative mertis and drawbacks of each scheme from the company's point of view. Which scheme is likely to put the company on a path of sales growth?
Explanation / Answer
Answer : Option 1 Merits. This is very happy position for sales team. If they get fix salary. they may be induced to work more without tension. they may be try to deliver thier best performance, because they are pressure free from targets.
Draw Back Sales team may be lazy. If they did not get any pressure to meet the target, they did not try to get the best result. They misuse the policy of the company and try to find a pretend to for not increasing the sales.
Option-2 Merits This may be a good option. Sales team try to get commission by inceasing the sales. They know very well that If they reach over the 90% of sales target, they will get the 5% commission. they would try to increase the sales of the company to earn more & more.
Draw Back : The sales team is always under pressure to increase the sales. they will use unfair means to increase the sales target. The use of unfair means may be destroy the company images. This may be harmfull to the company business.
Option 3 Merits This is also a good policy. Increasing in the Target as per industry growth is a realistic decision. all sales team familir with existing bonus policy. They may be try to get the best results.Everybody always agree with the increasing in sales target with the industry growth.
Draw back This is a good policy and not unfair the sales team, However the sales team familiar with the scheme. they did know very well that they will get their fixed salary , if they did not achieve the target. They will loss their bonus only, If they did not get the target. So, they may not be hurry to get the sales target or slaes over the target.
Option 4 Merits This is a good scheme. If we inroudeuced tournament between the sales team and bonus according the scheme. They will compete with each other and try to proov him self to best and get the bonus. They will think the new ways to get more & more sales. company's sales will be inrease rapidly without harm of the company buisness. It will be possible, If any sales person is using unfair means to achive the target, other sales person reveal the truth before company's management. Company will take the action on right time to save their images.
Draw back This scheme draw back is the Sales person did not help their collegues. This may be loose the some amount of bussiness. They will always create disputes. The Time of management will be waste to resolve these disputes.
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