Compensation (& Quotas)
3/2/99
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Compensation (& Quotas)
Quotas
Payout Plans
Mary Kay Cosmetics Case
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Quotas: What are you
willing to do?
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Quotas: An Example
IDC (International Data Corporation) a
publisher of market research for the
technology industry
Fixed payout for meeting quota (sell
$5million; get $100,000)
1.5% kicker for every 1% over quota… so
if you get 120% of quota you get 130%
of payout- $6million=>$130,000
From Sales & Marketing Mgmt, Sept. 1997
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Quotas- Why?
To help motivate salespeople
To direct salespeople where to put their
efforts
To provide standards for performance
evaluation
management by exception
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Quota Types
Sales (dollars, units, points)
Profit (gross margin, contribution margin)
Activity (inputs: calls, displays,
meetings,etc)
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When are they effective?
Goal Theory: proposes that difficult goals
(if accepted) will lead to higher
performance than lower goals or no goals
such as “do your best”
Classic study: high quotas put in place
for everyone; due to complaints the
company relaxed the quotas in a few
districts. The districts with high quotas
outsold those with lower quotas
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Administering Quotas
Past sales
forecasted sales
sales potential
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Quotas- advantages?
Everyone knows their quotas in advance
Easy to cascade corporate sales goals
through organization
Can capture some territory differences
Easy to understand payouts- although not
always easy to understand how the quota
itself is established
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Quotas-disadvantages?
Difficult to set accurately (especially for
new products)
Payout is hard to predict- exceed the
budget or turnover
difficult to adapt to changes through the
period (new products, territory changes,
new reps, etc)
requires good information systems to
properly credit sales
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Quotas- disadvantages?
Reps who earn less than their goal often
complain about the fairness of the setting
procedures
Good-performing reps may “coast” if
future quotas are dependent on past ones
Reps who have no chance of meeting goal
may cease most of their efforts
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Quotas- when for sure
“not”?
When teamwork is important- individual
quotas might be a problem- especially it
they’re done on a relative basis
Long selling cycle
rough on new reps
if also a high dollar amount then you run into
extremes (high/low)
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Relative Performance
Plans
may or may not have quotas
measure performance relative to a
benchmark: “average performer”
relative payouts are set in advance:
“top performer gets 2.5 times the average”
“worst performer gets 0”
“average gets average payout or pre-determined
amount”
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Drawbacks to Relative
Performance Plans
may not work in team-selling
environments
no goal - motivational issues
rep doesn’t know in advance what their
payout will be since they don’t know their
rank
rank must take into account territory
difficulty (unless based on % of quota- td
already accounted for)
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Calculate the annual income of:
(a) a consultant who sells an average of
$150 (at wholesale value) of product per
month;
 Retail Price= $300; therefore monthly income of $150 for the
consultant
 Annual Income= $1800
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Calculate the annual income of:

(b) a VIP team leader with 15 recruits
who averages monthly personal sales of
$650 and team sales of $3200 (assume
she receives a 12% commission on
recruits' sales);
Retail Price=$1300; therefore monthly
income of $650 for personal sales
Team Sales: 12% of 3200= $384
Annual Income=($650+$384) x
12=$12,408
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Calculate the annual income of:

(c) a director with 50 active unit members, who
averages monthly personal sales of $500, personal recruits'
sales of $5000, and total unit sales of $9500. Assume she
recruits three new consultants every three months, which
entitles her to a recruiting bonus of $200 per quarter. Apply
a 12% commission on recruits' sales and an 11%
commission to total unit sales. Also add in a monthly
production bonus of $700.





Monthly income from personal sales: $500
Monthly income from direct recruits: 12% of 5000=$600
Monthly income from total unit: 11% of 9500=$1045
Monthly Bonus: $700
Annual Income= $800 (recruiting bonus) +12
*(2845)=$34,940
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Mary Kay Cosmetics
Based on these calculations, what
components of the financial incentives
program appear to be the primary
motivators for the sales force?
Describe a typical VIP Consultant in terms
of
demographics
income
management responsibilities
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Mary Kay Cosmetics
Recommend a set of changes to the VIP
car program that will improve overall sales
force effectiveness at Mary Kay. Consider
the motivational risks and cost
effectiveness of your proposals as well as
how they could be implemented. Be as
specific as possible.
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Summary
Quotas appear to have strong
motivational value if well implemented
They are however difficult to implement
Need to trade-off the administrative
issues and potential payout problems with
the motivational gains
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