Olympia Case

P a g e  | 1 Name of the Student: Indranil Chakraborty Case: Olympia Machine Company,Inc.

1. What are the possible limitations that the current straight salary plan might impose on selling effort?

The following are the limitations of the Straight salary plan: 

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The company Olympia did not use a definite yardstick to determine the increase of pay. The company needs to have a definite parameter and the raise should be given based on the  performance on those parameters. As per the case1, the pay raise depends on the discussion  between the salesperson and and his superior, Carson, in this this case. Carson is a believer of  performance. But everyone may not be like like Carson. Hence, tomorrow if some other person person comes up then it will be difficult for the new person to measure the performance of the salespeople if there is no yardstick. Further, a good compensation plan should provide a common yardstick for all territories 2. This will help in finding out who the real achievers are and who are just sitting lazily on the fence. The system was questioned by many in the company since according to this plan the selling expenses were fixed irrespective of the volume of sales. If the market is cyclical then the selling expenses should also be set according to the volume of sales 3. With the fixed salary plan there was no additional financial incentive. Hence, there would not  be an urge to drive the sales effort. The system raised questions questions among the minds of the the employees concerning the performance of people without a financial incentive vis-à-vis  people with a financial incentive. incentive. For people with a financial financial incentive, they can see see a 4 reflection of their efforts . Few employees in the company also think that the current compensation plan is not going to create a proper balance between the capital equipment and sales. There are people in the organization that just goes on selling without caring for forthcoming orders. On the other hand, there are people who just take orders rather than actual selling. These extremities are visible with the current compensation plan 5. According to Manuel, the sales manager, the Product mix was not properly controlled by the current compensation plan. There need to be a properly weighted plan in order to capture the  product mix. In the current circumstances, circumstances, the salespeople do not know know what pays off and what does not. If the salespeople know what pays off and what does not, then they can design accordingly the long range territory plans, improve their routing and account coverage, and generally become more efficient 6.

2. What are the implications of three compensation alternatives?

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P a g e  | 2 Name of the Student: Indranil Chakraborty Case: Olympia Machine Company,Inc.

The three compensation alternatives are as follows: Point system Salary and Commission Bonus Plan   

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The Point system7:

The payment equation according to this system is:  Employee Payment = Salary + Bonus / Penalty  Payments. In the point system, the employee will receive a salary. Along with the salary, the employee will also receive either a bonus or penalty points for various selling activities. According to this system, the sales manager will assign task. Based on this task, the salespeople will receive points. Through this point system, the salespeople can earn direct compensation just by concentrating on the nonselling activities. Also, if a customer complaints against a particular employee, then the particular employee earns a penalty point. Such kind of point system can provide more control and direction of the many facets of the sales  job and the salespersons actual allocation of the effort. However, there are de-merits to this system. The biggest de-merit is that assigning the points is very difficult through this system. To assign the points, the detailed activity reports of the salespeople are required. Current job environment do not have a culture of detailed sales report and this could cost company a lot of money. Also, the salespeople were not interested in having such a system because the salespeople view this system as quite ‘bureaucratic’ and inappropriate for a relationship-intensive business. Further, many salespeople argued that there is no need for the company to pay the bonus for non-selling activities as the employee is already receiving salary for doing the non-selling activities. 

Salary and Commission8:

The payment equation according to this system is: E mployee Payment = Salary + E xpenses + Commission on sales.

In this system, the employee payment will consist of Salary plus expenses along with a commission on sales. The salary is going to contribute 75% and the commission 25% to the average person’s compensation. The people thought that this system will provide security to the employee and also due to the commission received, people will get to see a reflection of their effort, which in-turn will motivate the employee to perform a better job. Through this system, the commission rate could vary from product to product. Also, the commission rate will depend on profitability of the product line, the degree of difficulty in obtaining initial and repeat sales, and the company’s desire to emphasize certain items. However, there were de-merits with such a system. This system has to be tested with each and every employee as the commission rate will be different for each and every employee. Also, the 7

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P a g e  | 3 Name of the Student: Indranil Chakraborty Case: Olympia Machine Company,Inc.

salespeople needs to forego the 25% of their salary which is fixed and give this 25% to the financial incentive. Many salespeople may not be ready to forego 25% of their salary. Also, there were several questions that this plan brought about. Question such as “If the efficiency of salespeople are the same then would difference in territory potential affect the compensation  plan?” were raised. Further, questions related to the nature of the commissio n, whether to make commission rate flat or variable with volume, the timing of the incentives and the upper limits of the incentives were raised. 

Bonus Plan9:

The payment equation according to this system is: E mployee Payment = Salary + B onus

In the current system, the salespeople would get the same salary along with they can earn extra money through the bonus. The Bonus plan system differs from the Salary and Commission System in the sense that unlike the salary and commission system, the employees do not have to forego a certain percentage of its salary and put it into commission, instead the employee is going to receive the full salary along with the bonus. Also, there was no limit to the bonus. However, through this plan the company will not be able to maintain the sales-expense-to-sales-ratio. This plan contains a specific territory target for e ach territory. Also, this plan contains a yardstick for  product mix. For every territory the weighted and the actual point average for the product was calculated and the lower of the two were taken. The lower number was multiplied by the territory sales target to calculate the commission.

3. Can you imagine additional alternatives that would be appropriate? 

Tie salesman bonuses with their forecasts10: Often the Salespersons forecasts differ from the Company objective. If the territories are unequal, then the salesman can be rewarded according to how close his forecasts are to the company’s objective. In the old system, the salesperson commissions were proportional to his / her sales.

Initially, 2 systems were in place. The first was the achievement system which said that the sales  people be paid on how much sales they can bring. The 2 nd system is called the objective –  achievement system which says that Salesman with good sales prospects will get higher objectives than the salesman with lower sales prospects. An example of Objective  –  achievement system is as given below:

Employee A Employee B

Possible Bonus

Objective

Achievement

Percent of objeclive

Actual  bonus

$20,000 $18,000

$800 $500

$600 $500

75% 100%

$15,000 $18,000

From the above, we can see that the Employee A even if his achievement is higher gets lower bonus  because he fulfills just 75% of his objective. On the other hand, the Employee B, whose Achievement is less than A but still gets a higher bonus because he fulfills higher percent of 9

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Gonik (1978) - Tie salesmens bonuses to their forecasts

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objective. However, the objective achievement system also has cracks. For e.g.: If an employee is asked to update the prospects lists with the information to indicate how many units the customer will buy the following year. Then, the employee may think that based on his figure and the information he supplies, his quota for the next year will be set and thus this may limit his gains. Thus, in the Objective-achievement system the employee sees the forecasting as an enemy. As a result, the employee does not add any new names to the prospect lists. Thus, at the end of the year, in December 31st, the 90- day forecast stands at zero. However, with the new year the production clock gets a rewind and the employee gets a new quota which is obviously on the lower side and easily achievable. In this way, though the objective is met but the required percentage of growth is not taking place. This results in breaking of the trust between the employee and the superiors. The superiors think that the employee has deliberately underperformed. Another reason is that sometimes due to unexpected order from a big builder, the employee can surpass the objective and therefore entitles himself for a higher bonus. This is also not desirable since the unexpected order just came by luck and the employee made no extra sales effort in obtaining it. This makes the system defunct . Thus , there needs to be a new system which can base the earnings of Salesman on 3 parameters : The objective O ( the quota which the company chooses) , the forecast F the salesman provides and the actual A , the result the salesman achieves. This system is called OF A system11 and is introduced first in Brazil in 1978. The OFA system follows a grid and there are formulas. The 3 main formulas for the OFA system are as follows:   

If F equal to A, then OFA = 120 * F / O If F is smaller than A, then OFA = 60 * (A +F) / O If F is bigger than A, then OFA = 60 * (3A - F) / O. Here “F” stands for Forecasted and “O” stands for O bjective and “A” for the actual.

An example of how OFA works is as follows: Employee A sells Air conditioner. His quota is 600 A/C to be sold. Let us assume that A fully adheres to his quota and had a forecast of 600 Units. Thus, F/O equals 1.0(F=A=600). Employee A sells 600 A/C, thus he makes 100% of his objective and gets 120% of his bonus. Thus, Employee A receives a 20 %  premium for good planning. However, the value of 20% in dollars depends on Employee A’s personal value, namely, his experience, time with the company, and merit. If Employee A sells 900 A/C, which is 150% of his objective, he gets 150% of his bonus; thus, the more he sells the more is the incentive to earn. However, now Employee A realizes that if his forecast had been 900 instead of 600 units (1.5 on the grid), then he would have received 180% of his bonus instead of 150%. Thus, the Employee A realizes that the bad planning on his part is the bane and has robbed him of a good chunk of money. In case Employee A sells 300 units, half of his objective (600), he would have earned just 30% of his incentive. Thus Employee A feels that he should have rightly forecasted 300 instead of 600. Hence, his earnings would have been 60%. Thus, the OFA system gives an employee to forecast accurately and the better the forecast the forecast of the employee; the higher is the incentive to earn. Through the OFA system, the employee participates in creating their own objectives. 4. What should the Olympia executives do? 11

Gonik (1978) - Tie salesmens bonuses to their forecasts

P a g e  | 5 Name of the Student: Indranil Chakraborty Case: Olympia Machine Company,Inc.

Firstly, the Olympia executives should not go for the point system 12 as it is not well perceived by the Salespeople who thinks that the point system is bureaucratic. Also the point system does not works well in the relationship intensive business. Secondly, the Salary and Commission system 13 may not augur well with the employee because of the reason that many employees had to forego a certain percentage of their salary and had to put that as  part of the commission. Further, the commission depends on performance and is not a certainty. Thirdly, there is a proposal for Bonus plan 14. The bonus plan looks good in the way the target quota was set looking at past sales, the estimates of salespersons and the analysis of individual product  potentials. Also, the yardstick for the product mix which was missing was also included. The theoretical and actual average point per territory calculation was good and gives a more realistic  picture of the compensation. The Bonus plan can be modified to include forecasting in a way such that the employee gets motivated to forecast accurately. If the Employee can forecast accurately and can achieve his objective in accordance with the forecast, then the employee should be given a better pay.

5. How should the changes be communicated?

The senior management should inform the employee about the latest compensation process in the team meetings. In the meetings, the senior management should discuss on each and every  parameters of the change. If required, the HR department should provide the employee a session on understanding the compensation process. Also, the system should be well marketed internally in the organization through managers should can as a vocal champion for the change process and thus creating an urgency for the change. Also, the team which implements the sales process should be awarded.

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