Archer Stationers

Office Supply Company

Section AB1 Group Number 2 Aakash Tyagi 2010002 Aditya Mehra 2010020 Ankit Khandelwal 2010036 Chetan Arora 2010065 Ashish Mohan Srivastava 2010268

An introduction to the case:

John Archer started the store in 1948 at Oklahoma City, Oklahoma The product line consisted of office supplies, stationery, office machines and equipment, desks, files, engineering supplies and accounting systems Engineering supplies and accounting systems were sold by an outside sales person Al Caines, Mary Satterly and Cecil Grey sold items relating to office Jack Rubin and Bill Westerfield sold engineering supplies line Otto Olsen and Mike Sanchez sold accounting systems Except Al Caines and Cecil Grey all other sales personnel were new recruits each having less than 6 months of experience. New product lines were introduced Chances of employee to continue with the company increased if they stayed for one year.

Case Analysis:
The key issue under consideration for John Archer was the high rate of turnover among outside sales personnel. Actually archer employed a total of twenty-nine people. Of these, seven were outside sales people who dealt with businesses throughout Oklahoma and the Texas panhandle. After an in-depth analysis of the case the following inferences can be drawn: Drawback of Drawing accounts If sales personnel become greatly overdrawn, they may lose incentive to produce, because earned commissions are used to reduce the indebtedness. Some sales personnel become discouraged with the prospect of paying back overdrawn accounts and quit the company An adjustment in the existing compensation plan is required however the entire plan need not to be changed. Additional sales effort is needed to operate at optimum capacity, an adjustment in compensation may be required

In order to control the existing problem of high turnover we need to consider the following alternatives:

Define the sales job: Sales volume objective, for instance, whether in dollar, units of product, or number of dealers and distributors, are translated into what is expected of the sales personnel, as a group and individually as there is a definite need for documentation of the work performed by the sales personnel for future use by the new employees so that they dont have to start from scratch and as evident from the case no such documentation was done. Job evaluation and sales positions: Because compensation level for sales personnel are related to external supply and demand factors hence to sell products of new product line extra effort are made so product wise compensation may be designed. Management should ascertain whether the calibre of the present sales force measure up to what the company would like to have. Management regards some sales personnel as indispensable or management inertia prevents adjustment of the compensation level to the compensation level to changed selling conditions. Possible compensation plans: 1) Fixed element, either a salary or a drawing account, to provide some stability of income; 2) A variable element (for example, a commission, bonus, or profit sharing arrangement), to serve as an incentive; 3) An element covering the fringe or plus factor such as paid vacations, sickness and accident benefits, life insurance, pension, and the like and 4) An element providing for reimbursement of the expenses or payment of expense allowances. 5) A fixed plus variable element in compensation

A fixed plus variable element in compensation seems to be most suited in this case as it brings less change to the existing compensation plan and in accordance with the data

provided in the case, compensation rates can be graduated so that higher rates apply to larger orders Types of compensation plans Straight salary, straight commission and a combination of salary and variable element It is logical compensation plan when the selling job requires extensive missionary or educational work, when the sales people service the product or technical and engineering advice to prospects or users, or when salespeople do considerable sales promotion work. If no selling task bulk large in the sales personals total time expenditure, the straight salary plan is worth of serious consideration It provides strong financial control over sales personnel, and management can direct their activities along the most productive lines Since there are no direct monetary incentives, many salespeople do only average rather than an outstanding job. They pass up opportunity for increased business, until management become aware of them and orders they require actions. Unless the plan is skillfully administered Straight commission plan The theory supporting the straight compensation plan is that individual sales personnel should be paid according to productivity. The assumption underlying the straight commission plan is that sales volume is the best productivity measure and can, therefore. Be used as the sole measure. Some provide for progressive or regressive changes in commission rates as sales volume raises to different level The straight commission plan is used in situation where no selling duties are relatively unimportant and management emphasizes order getting Advantage is that it provides maximum direct monetary incentive for the salesperson to strive for high level volume It provide a means for cost control - all direct selling expenses, fluctuate directly with sales volume changes and sales compensation become virtually an all variable expense

Salespersons on straight commission plan often feel they are discharging their full responsibilities by continuing to send in customers orders, they are careless about transmitting reports, neglect to follow up leads, resist reduction in the size of sales territories, considerer individual account private property, shade prices to make sales. Unless differential commission rates are used, sales personnel push the easiest to sell low margin items and neglect harder to sell high margin items

Salary plus commission Most sales compensation plans are combination of salary and commission plan. Most developed as attempts to capture the advantages and offset disadvantages of both the salary and commission systems. Where the straight salary methods are used, the sales executive lacks a financial means for stimulating the sales force to greater efforts. Where the straight commission system is used, the executive has weak financial control over no selling activities. By a judicious blending of the two basic plans, management seeks both control and motivation. Actual results depends upon managements skills in designing and administering the plan Sales personnel have both the security of stable income and stimulus of direct financial incentive. Management has both financial control over sales activities and apparatus to motivate sales efforts. Most companies split the fixed and variable on a 60:40 to a 80:20 basis

Critical Issues and There Plausible Solutions!!!

Ques 1: Was the existing compensation plan for Archer Stationers salespeople contributing to the high turnover? Answer: Yes, some of the facts which are there in the case are: With exception of Al Carnes and Cecil, the company had experienced high turnover in its outside sales force.

 The commission paid was decided on the basis of the gross profit they made which was calculated by the formula=revenue-expenses and on that profit the sales person was given 10% on it. For example, if a sale man make sales of $50,000 and the expense were $45,000 than the gross profit was $5,000 and on that the commission for the sales person was 10% of its which is $500. Same compensation plan was there for each department irrespective of the product that they sold as Otto Olsen who sold accounting systems explained that accounting systems were of little value to the company. Debt problem will occur for the employee as if a sale man doesnt make any sale in a month than the sales man will get $1,500 but when sales happen than he or she has to pay back the difference between the amount earned and the amount paid thus increasing the burden of debt. The commission percentage was fixed at 10% thus not motivating the sale man to put more effort in selling more quantities.

Ques 2: What changes, if any, would you recommend in the compensation plan? Answer 2: It is inferred from the case analysis that the compensation plan seems to have certain inherent flaws which could be improved by incorporating the following changes/solutions: Problem 1: As it is evident that the drawing amount that was allotted to each sales personnel was in a constant ratio. That is everyone was allotted the same amount of $1500, irrespective of the department. The result was that for departments having new recruits it was really difficult to match the monthly sales target and this would often lead to discouragement and dissatisfaction among the new sales personnel because of which they had no option but to quit and thus turnover/attrition was very high. Plausible Solution: The group was of the consensus that instead of having the same fixed target for every department if the management opts for a variable target say for example $1000 or $500 for departments having the less experienced and new recruits, then it would be really feasible for the sales personnel to achieve the target. This would not only boost their morale but also the turnover rate could be controlled.

Problem2: Also it is observed in the case that, the sales personnel who failed to earn $1500 in any month was obligated to pay back the difference between the amount earned and amount paid; this was subtracted from the earnings in excess of $1500 in succeeding months. This practice has really been a cause of concern because we can easily infer from the EXHIBIT 1 that Otto Olsen, Bill Westerfield and Mike Sanchez who are new to the organization have not been able to make wages in excess of their drawing account and those who could manage that were in debt to the company for the past draws. Thus sales personnel under huge debt would lack the motivation to continue with the company, thereby leading to the problem of high turnover. Plausible Solution: The change that could be helpful in doing away with this problem could be that instead of looking for the short term results the company should give its sales people some time to settle and that could be done by paying them a fixed salary and even if they want to compensate the difference of the amount earned and the amount paid they could take a certain percentage of the difference as it would reduce the pressure on the sales people and once they start earning appreciable amount they would get motivated and with no debt they would strive better to match the sales target. This would help the company in long run, as with less attrition rate the overall profitability would be improved. Problem3. Another area of concern in the compensation plan is lack of any loyalty incentive. Plausible Solution: In order to acknowledge the longevity and association with the company there could a reward system in place. For instance, any employee who has been with the company for a certain period of time (say for 5 years) must be acknowledged with some extra monetary benefits. This could prove to be very effective in employee retention and thus the problem of high turnover could be mitigated to an appreciable extent.

Problem4: The fixed commission rate was 10% of the gross profit which does not involve any sort of dynamism and thus could be another area of concern as per the compensation plan was concerned. Plausible Solution: The commission rate could be made more lucrative by incorporating a certain degree of dynamism. For instance, it could be made variable and with certain increase in sales it should vary appropriately. But in order to control any ambiguity there must be

some upper cap. This strategy would further give the employees extrinsic motivation to work better and they would seek great incentive in being with the company. 1) Provide living wages 2) Adjusting pay level to performance and reward (in line with expectation theory) 3) Provide a mechanism for demonstrating the congruency between attaining company goal and individual goals (in line with expectation theory) 4) Consult the present sales force 5) Management should encourage sales personnel to articulate their likes and dislikes about the current plan and to suggest the changes in it. 6) Reduce tentative plan to writing and present it 7) If the sales pattern has shown considerable fluctuation, calculation are made periods representative of average, good and poor business 8) Management should convince them of its basic fairness and logic 9) Fixed part + variable part, should not penalize sales personals for the factors which are beyond their control 10) There should be a provision for equal pay for equal performance 11) They should be able to calculate their own performances. The new compensation plan may be so designed so that it will help in retention of the employees, their loyalty shall increase, giving them motivation to perform more, giving safety factor to the sales personnel and not putting extra Burdon on the company. An example to illustrate the feasibility of above stated recommendations!!! Slab of commission (variable component)
Percentage commission 0 5 8 12 16 Sales Revenue $ (from) 0 1,68,000 2,50,000 3,50,000 4,20,000 Sales Revenue $ (till) 1,68,000 2,50,000 3,50,000 4,20,000 unlimited Commission earned $ 0 4,100 8,000 8,400 unlimited

Slab for fixed salary (fixed component)

$ 1400 per month for initial one year, and with an increment of $ 50 per year; sales personnel should maintain 10% of his sales Revenue equal to the fixed part for 1.5 year to be eligible for the job
Employee Al Carnes Cecil Gray New employee Last year $ 44,000 36,000 New fixed $ 22,900 21,000 16,800 New variable $ 23,700 13,300 Total New $ 46,600 34,300 16,800

Sales of one and more old employee is taken same as last years for calculation of salary as per new income plan New employee is considered to be below $ 1, 68,000 hence earning no incentive Total expenses of company last year as per last year = $ 1, 70,000 Total expenses of the company as per last year sales, in accordance of new compensation plan = $ 1, 64,900

Ques.3. Are there any Other Factors that might be contributing to high turnover of the sales personnel? Answer. 3 The most important issues have been already highlighted in the questions before, yet we would like to give some other probable reasons of the high turnover rate in the company: 1) Formal Training: When in sales job, each and every individual should go through a formal schedule of training so as to get know-how of the market conditions and the things expected out of him whilst on the job. We find no mention of anything like that and its effects thereafter. Hence, this can be an add-on to the constant misery of the sales force. 2) Mentorship: We talked about the Formal training which is/is not provided by the company; hence the least that is expected from any growing firm is a mentorship program that is focussed on grooming the new talent and nurtures it to have a standing in the new set of people and an effective sense of understanding. 3) De motivation: Since a new employee is expected to bring in new sales and everything from day one of his job, which is not humanly possible in the new set of things, De motivation is a given. A timeframe must be put in place in order to get the person have a clear understanding of what is required of him.

4) Let there be a fixed salary component and variable component, the fixed component may increase with the year with the company plus the variable part must be progressively increasing with the volume sold. 5) With fixed component into place, management can make sales persons to do documentation of the work done that can help the new sales persons that join the company, increase efficiency and new employee will not have to start from the scratch. 6) Department wise compensation shall differ according to the value perceived by the customers, the market launch time of the product line, other than sales activity required before actual sales. 7) It is not uncommon to work with fundamentally poor compensation plan to work satisfactorily, when a skilled executive administers it