MT455 Unit 7 Commission Plan Evaluation Example

$72,500 for the Wrong Mix: An MT455 Unit 7 Incentive Plan Evaluation Tested on Two Sellers

[Student Name]

Purdue University Global

MT455: Strategic Management of Sales

Unit 7 Incentive Plan Evaluation

[Instructor Name]

[Date]

Keystrand Access, its sellers, its plan and every figure are composite; the sources cited are real.

The Plan as Written

Keystrand Access pays its field sellers a target of $200,000 in total earnings, split 60 percent base salary and 40 percent incentive: $120,000 base and $80,000 incentive at quota. Each seller carries an annual quota of $1.6 million, and hardware and first-year subscription bookings count toward it equally. Commission is 5 percent on bookings up to quota and 7.5 percent on bookings above it. There is no cap. There is no adjustment for discounts, so a reader sold at 30 percent off counts the same as one sold at list. Renewals earn nothing.

Seller A

Seller A booked $1.62 million of hardware at an average discount of 19 percent, plus $480,000 of first-year subscription, for total bookings of $2.1 million, 131 percent of quota. Her incentive pay is 5 percent of the first $1.6 million, $80,000, plus 7.5 percent of the $500,000 above quota, $37,500, for $117,500. Most of her bookings, about 77 percent, were hardware, and most of that was sold to large single-site and mid-market customers at deep discounts in the last month of each quarter.

Seller B

Seller B booked $350,000 of hardware and $550,000 of first-year subscription, total bookings of $900,000, 56 percent of quota. Her incentive pay is 5 percent of $900,000, $45,000. About 61 percent of her bookings were subscription, mostly three-year agreements with two health systems.

What the Comparison Shows

Seller A earned $72,500 more than Seller B. Neither seller did anything wrong under the plan as written; both simply did what it paid them to do. Seller B sold $70,000 more subscription, the revenue the strategy values most, and won two of the six health system customers the company signed all year. Seller A's extra pay came entirely from hardware volume sold at a 19 percent average discount. The plan paid most for the behavior the strategy most wants to reduce.

The seller who sold more of what the strategy wants earned $72,500 less than the seller who discounted hardware.

Strong and weak performers were chosen deliberately. A plan that looks sound for a seller at exactly 100 percent of quota often behaves badly at either end. Chung et al. (2014) found that the structure of incentive plans, including quotas and accelerators, shapes how hard and when sellers work across the year, so the ends of the distribution show what a plan really rewards.

The Criteria Matrix

Each criterion receives a score between 1 and 5, where 1 means the plan works against the goal and 5 means it supports it fully. There are five criteria, taken from the company's own strategy memo in Unit 2 rather than from a generic list.

Strategic alignment: 1. The strategy asks for subscription revenue and renewals; the plan credits hardware equally and pays nothing for renewals.

Discount control: 1. Commission is calculated on booked revenue after discount, but a seller loses only a few percent of commission on a deep discount while making the sale far easier. The plan gives sellers almost no reason to protect price.

Motivation across performance levels: 2. Seller B, at 56 percent of quota while doing strategically valuable work, earns 56 percent of target incentive. A seller doing the right work slowly, in long health system cycles, is paid as a weak performer.

Cost of sales: 3. Incentive pay ran at about 5.6 percent of Seller A's bookings and 5.0 percent of Seller B's, within the company's budget, but much of Seller A's pay bought low-margin hardware.

Simplicity: 5. The plan is easy to understand, which is its one clear strength.

A Revised Rate Structure

The revised plan keeps the $200,000 target and the $1.6 million quota but changes what earns commission. Hardware earns 3.5 percent, falling to 1.75 percent on any hardware sold at an average discount above 15 percent. First-year subscription earns 6.5 percent, rising to 9.5 percent on subscription above $800,000 in a year. Renewals earn 3 percent. Bookings are measured annually rather than quarterly, so no month-end accelerator invites timing games. Zoltners et al. (2006) recommend that every plan component point to a behavior the company wants, and each change here answers one line of the criteria matrix.

At a target mix of $800,000 hardware and $800,000 subscription, a seller earns $28,000 plus $52,000, the $80,000 target incentive.

Testing the Revision on Both Sellers

Seller A, with $1.62 million of hardware at a 19 percent average discount, earns 1.75 percent on hardware, $28,350, and 6.5 percent on $480,000 of subscription, $31,200, for $59,550. Seller B earns 3.5 percent on $350,000 of hardware, $12,250, and 6.5 percent on $550,000 of subscription, $35,750, for $48,000. The gap between them falls from $72,500 to $11,550. Seller A still earns more, because she sold more, but no longer earns most of it for discounting.

How the Revision Changes Behavior

The revision changes the arithmetic of a seller's next decision. Under the current plan, a seller deciding whether to offer a 25 percent discount on a $100,000 reader order to close it this month loses only $1,250 of commission against the full-price deal, while making the sale far easier. Under the revision, the same discount halves the hardware rate on that order, and the seller's commission on it falls from $3,500 to about $1,310. Under the current plan, a seller choosing between spending a week on a hardware order and a week on a health system subscription earns the same rate on either; under the revision, the subscription pays almost twice as much per dollar. Those two decisions, made hundreds of times a year, are where the strategy is won or lost.

What the Revision Does Not Solve

Three problems remain. Seller A's pay falls by almost half, and she is likely to resist; the plan needs a transition period, such as a guaranteed floor for two quarters. Health system sellers still have long cycles, so their quotas should be set from territory potential, as Unit 8 does, rather than copied from the hardware-heavy past. And the discount threshold of 15 percent is a judgment; Larkin (2014) shows that sellers learn to work around any threshold, so discount patterns should be reviewed each quarter to see whether deals cluster just below it.

References

Chung, D. J., Steenburgh, T., & Sudhir, K. (2014). Do bonuses enhance sales productivity? A dynamic structural analysis of bonus-based compensation plans. Marketing Science, 33(2), 165-187. https://doi.org/10.1287/mksc.2013.0815

Larkin, I. (2014). The cost of high-powered incentives: Employee gaming in enterprise software sales. Journal of Labor Economics, 32(2), 199-227. https://doi.org/10.1086/673371

Zoltners, A. A., Sinha, P., & Lorimer, S. E. (2006). The complete guide to sales force incentive compensation: How to design and implement plans that work. AMACOM.