Reference no: EM133518965

Case Study: Selling the Sales Force on Commission Laughter could be heard from the back office as the sales associate and his part-time assistant were jokingly discussing the last sale. Then the woman said to me, 'Do you absolutely guarantee that your product won't scratch my wood floors and won't mark my kitchen linoleum?' 'Guarantee,' I repeated. 'We not only guarantee that our product won't scuff or muff your wood or vinyl surfaces but the Oreck vacuum has been scientifically designed with a floating head system that will adjust itself to any surface.' I then demonstrated how the vacuum easily glides from our carpeted portion of the store to the wooden area by the register. I immediately handed her the vacuum and asked her to try it herself. She vacuumed half the store just to test it out. "She bought the best upright vacuum in the store including extra bags and a room deodorizer. Let's see if you can do any better with your next customer". The local Oreck vacuum store was owned by Mr Paulson who classified himself as a super salesman and took great pains in training his sales force on how to close a deal. The store was always staffed by two employees: one full-timer with one part-timer to cover Paulson's two days off. The training consisted of On-the-Job Training (usually watching Mr Paulson go through several Oreck vacuum presentations) coupled with take-home material, including a sales script and product information. Inventory was computerized, and therefore it was easy for a trainee to check his or her price knowledge using the computer. After several observations of Mr. Paulson's sales techniques, the trainee was then allowed to make a sales presentation on his or her own, with assistance provided by Mr. Paulson as needed. The trainee was then debriefed by Mr. Paulson and asked to make changes in the presentation as needed to better close the customer. The full-time employee worked six days, 48 hours per week (including Saturdays and Sundays), with the part-time employee working only on the weekend.

There were two distinct revenue streams: sales, which accounted for 90% of the revenues (predominantly of vacuum cleaners), and repair work. In terms of sales, by far the best moving item was the Oreck XL followed by vacuum bags (which were carried for all makes and models) and cleaning accessories. The markup on vacuums and other cleaning equipment was 100% while the markup on cleaning products and ancillary items was 200%. Repair work was priced at 200% over parts costs plus a US$29.95 flat labor fee. Price Flexibility Unlike most other retail operations, Mr Paulson allowed his employees some price flexibility on big-ticket items, including the Oreck XL. These items did not have prices listed on them, and the sales personnel were instructed not to divulge the price until their sales presentations were completed. Sales personnel were given the option of either dropping the price (e.g., a US$499 machine could be lowered to US$449) or offering the customer an additional incentive for purchasing the machine (e.g., extra bags, upgrade in the vacuum cleaner). Customers could also receive a trade-in allowance (e.g., US$25 for a machine in any condition) at the time of the sale. Mr Paulson preferred that his sales force drop the price rather than let a customer walk out of the store empty-handed, although he always cautioned his sales force not to drop the price too the store empty-handed, although he always cautioned his sales force not to drop the price too early in the sale. Employee Compensation The average wage earned by employees at the store was considered fairly low for the region. Full-time employees received a straight salary of US$500 a week plus benefits (complete medical and dental coverage, two weeks paid vacation, no sick or personal days, unpaid holidays when available) and earned a commission of 2.5% of gross store sales over US$7,000 a week. Part-time employees received US$65 a day plus a commission of 2.5% of gross store sales over US$1,000 per day they worked, and they received no benefits. Store revenue generally ran about US$6,500 for the week with a 20% net profit margin. Third-party exit interviews with several of the ex-employees indicated that the owner put inordinate pressure on them to sell products and services to the customers. "I felt like I always had to sell the customer something whether they needed it or not. Paulson felt that you could always find a way to overcome customers' objections, even if it meant using pressure sales tactics. I wanted to build up customer loyalty for the store over the long run, but you can't do that by browbeating consumers into sales just to try to make commission. A straight weekly salary would have remedied that problem". Other complaints included tying the commission into total store sales (rather than individual sales), working weekends without a pay differential, working six days a week, and the fact that the commission base was set higher than the store weekly average sales. The owner indicated that many of the employees who left the job just did not seem to have the selling instinct needed for his sales force, and high turnover was therefore not only expected but desired in order to get the best salespeople. When questioned about the compensation package, Paulson replied, "This scheme is used to motivate my sales force. I want hungry employees who want to sell. If they do a good job in selling, they get rewarded-if they don't sell, they have a base salary to get by on. Many of my employees leave because they cannot sell enough to earn a commission. I know that it's hard to live on US$500 a week, but I do not want to have employees who just sit around and collect a paycheck".

Case Questions:

1. What is the compensation package for the full-time sales force at the store? Classify by kind of compensation.

2. Explain Paulson's rationale for the current compensation system using expectancy theory. Why might his ex-employees have disagreed with his rationale?

3. Using equity theory, explain why Paulson's compensation system may be deemed as inequitable by his former employees.

4. Describe Paulson's current compensation philosophy and structure. Use calculations to understand how much Paulson can afford to pay.

5. Do you think this compensation philosophy is an effective one? Give reasoning.

6. Prepare a new compensation plan for this company.