Reference no: EM132252529

Francesco Rizzo established Francesco’s Bike World, a retailer of bicycles and related parts and gear, in 2010 in Milan, Italy. The company saw steady growth in its first few years and had opened eight stores throughout Italy by the beginning of 2016. Francesco is the owner and acts as the general manager for all stores. Each store has one manager and four to six salespeople, with two to three working on the sales floor at any given time. Francesco himself is a bike enthusiast and rides more than 200 kilometers per week. He encourages his sales staff to do the same and looks for fellow bike enthusiasts when hiring. As a result, the sales staff generally loves to buy equipment from the store, especially since Francesco gives an employee discount of 10 percent.

Francesco’s sales revenues increased by almost 15 percent each year for the first five years of the company’s existence. But since that time, sales revenues and profits have declined at approximately the same rate. According to Francesco’s analysis, the decline did not seem to have a single cause: a down economy, opening too many stores too quickly, rise of price from suppliers. He has tried to reduce costs to maintain consistent profits but has cut them to the point where the only remaining reductions would be to begin closing stores, which he does not want to do.

Francesco has always prided himself on having a top-notch sales staff. Although the staff shares a common bond of love for cycling, they are a heterogeneous group in other ways. About one-half are in their 20s, one-quarter in their 30s, and one-quarter in their 40s. Some have families, some do not. Some are married, some are single. Some rely solely on the job income to live, some do not. For the first six years, Francesco paid his staff a straight salary in the range of €22,000 to €34,000, depending on sales experience, with an annual bonus of €500 if the salesperson met the standard sales quota for the year. Francesco liked the stability the salary provided his staff, especially those with families. However, after the sales began to drop with the onset of the recession in 2008. Francesco decided that the staff would sell more if they were better motivated. So he instituted a new compensation plan that paid the sales staff on 100 percent commission. To allow for some stability, there was a system of a “draw” where employees could borrow against future commissions. This plan has now been in place for almost four years, but sales are still declining. Francesco recently sat down with his best store manager, Luca Moretti, to assess the commission-based compensation plan.

They started with Francesco’s business goals in order of importance: (1) increase sales revenues relative to quota, (2) increase customer satisfaction and customer loyalty, (3) increase sales for certain product lines, (4) take advantage of bike knowledge of the sales staff, and (5) encourage bicycle riding in local events.

Then they examined the staff. Luca’s first observation was that the sales skills of his staff vary greatly. For example, top performer Leonora Rossi has no trouble meeting her monthly quota; she even makes it so early in the month that she can relax for the remaining time. However, other salespeople like Ruggiero Giordano do not sell as easily and feel pressure because they support big families. Moreover, Ruggiero and others have taken money from the draw but then felt even more pressure for being far behind. Several have even quit to eliminate their debt, leaving Francesco with a loss and having to incur the added expense of training new hires. In addition, the sales approach has evolved into one of pressuring the customer to buy rather than building a relationship and taking the true needs of the customer into account. Also, there has been little effort to follow up with customers after a sale, assist with bike maintenance, or even clean up the store. As a result, customer loyalty and retention have been down. Furthermore, the old team environment, where a salesperson with a customer would call over a more knowledgeable salesperson to answer a customer question, has been replaced with an “every person for her- or himself” mentality.

Francesco and Luca decided that things must change, and the compensation plan was the place to start.

Questions

1. Did Francesco and Luca do a good job of assessing the situation with respect to the compensation plan? What other information would you like to have that is not given?

2. What were the advantages and disadvantages of Francesco’s straight salary compensation plan? What were the advantages and disadvantages of his straight commission plan?

3. Given the preceding facts, recommend to Francesco a combination compensation plan that would best suit his situation. What other compensation devices might you use in addition to bonus, salary, and commission? Explain your recommendation.