Case: Houston Fearless 76, Inc. The company in focus has undergone a lot of development and changes until its current set-up and composition as Houston Fearless 76. Being confronted with external hazards as the continuous demise of the industry it is operating in and internal challenges as lack of revenue growth and profitability, the company is standing at a strategically highly important and past due turning point in late 2000. The company is set-up into four divisions (Extek Products, Mekel Technology, HF Interntaional, and HF North), which all concern different products at different market stages and operate as profit centers.
According to Merchant and Manzoni (1989), there are two main strategies to organize budget targets in profit centers, namely setting highly achievable and less achievable targets. While the latter is consistent with motivational theory, challenging yet highly achievable targets are common practices in management nowadays due to several reasons as for instance predictability and flexibility. As opposed to prior research, these targets are apparently not hindering motivation (Merchant and Manzoni, 1989).
At the same time, there are various arguments for setting less achievable targets, for instance to signal dissatisfaction with performance, to attain immediate profit, and of course to motivate. As motivation and incentivizing is the main focus of HF 76 top management, links can be drawn to the case at hand: how should the sales commissions be set up in order to motivate salespeople? And how should they be organized to not only drive sales, but also to incentivize to strive for profitability, new customer and market development?
HF 76’s top management decides to tackle change from the core, as the mere sales orientation of the commission plan disregarded various important factors. The management sees three areas of improvement and has come up with a more challenging and aggressive plan; instead of a linear increase of commission payout to sales dollars, commission is now paid according to gross margin on sales; not until 70% of the gross margin plan is reached, but with a steeper increase.
Further, both sales forecast accuracy and individual MBO targets are each accredited with 5% of base salary. As for the last years of HF 76, basically only financial figures were monitored – or as the VP Sales puts it: “We can’t afford raises, so why bother evaluating people? ” The new bonus and target system aims at capturing various subjective and objective factors, but it is, regardless of suitability, not set up according to the balanced scorecard.
Although all monitoring and control systems have their trade-offs, the complex and manifold measures call for the implementation of the balanced scorecard, as structures and categorical clusters increase goal-clarity and avoid the problem of ‘information overload’ (Lipe and Salterio, 2002). Further, the balanced scorecard would allow for representative evaluations, as the set MBO targets are highly subjective. The new incentive plan aims at the right direction and encompasses the main issues at hand.
However, it is advisable to implement the balanced scorecard system due to the above reasons. Also, the MBO factors include important factors of change, which is why it might make sense to develop a consistent, but individually adapted criteria catalogue and give them a higher weight. Considering the market turbulences and the high uncertainty, the forecast accuracy factor might be rather demotivating and should be corrected to at least 15% plus/minus.
Further, the sales assistants constitute valuable resources for the achievement of the new goals and should be integrated more into sales processes and planning. References: Lipe, M. G. and Salterio, S. , A note on the judgmental effects of the balanced scorecard’s information organization, Accounting, Organization, and Society, 27 (2002) 531-540 Merchant, K. A. and Manzoni, J-F. , The achievability of budget targets in profit centers: A field study, The Accounting Review, July (1989) 3