Week 2 Practice Case – Office Solutions Inc.

Question: Evaluate the new approach for compensating the sales representatives at Office
Solutions. What improvements would you suggest?

Introduction

The purpose of this report is to advise the and president of Office Solutions Inc., Bob Mairenea,
on the implementation of a new compensation system. Office Solutions Inc. was founded in 1984
and operates in California, by 2014 it was generation approximately $36 million in annual
revenue. Bob is looking to implement a new compensation system but is hesitant about this new
system and about how to transition from the old system. The main issue with the current system
being that it fails to motivate sales representatives to bring in new clients. This report will
include an assessment of the company’s internal and external environments. We will aim to
identify key issues and analyze different alternatives for each with the goal of advising Bob on
the best course of action to take for the success of Office Solutions Inc.

Assessment of Office Solutions Inc.

Internal environment: As mentioned above, Office Solutions Inc. is a well-established company

that is generating significant revenue. This desire to change the compensation system was partly
prompted by the need to reduce selling cost in order to be more in line with the competition. It is
important to note that the company uses sophisticated management system. The performance of
each sale rep is carefully tracked and compared against goals set by management. The company
records new accounts acquired and the revenue brough in from new accounts by each sales rep.
This is important because by thoroughly knowing the performance of each employee, the
company is well equipped to make this transition in and to do it effectively.

In order to properly advise the president of the company, we must have an understanding of the
company’s current sales compensation system and the roles of sales representatives. Currently,
sales representatives are paid using a commission system with a small part of the compensation
package attributed to bonuses. However, not all sales representatives perform equally, some
bring in new clients and some don’t. Bob came to think of implementing a new system both
because the current one does not provide sufficient motivation for sales reps to bring in new
clients, which does not suit the company’s growth objectives, and because he sees an alternative
system that would be less costly. We must evaluate the new system proposed and advise Bob on
the best approach to implement the new compensation system and on how to make sure
employees will be motivated enough to reach the company’s growth goals.
Analyze Major Issues

We will discuss the implementation of the new compensation system; whether the company
should go ahead with this plan or if they should create incentives for all sales staff to bring in
new accounts. First, Bob plans to identify certain sales representatives, who don’t generate many
new clients as ‘account managers’ and the ones who do bring in new clients would remain ‘sales
representatives’ and would keep the same pay structure that is currently being used. With the new
system, employees who would be categorized as account managers, would be paid using the
following structure: 70% base salary and 30% variable compensation (including both
commission and bonus). As a reminder, the current system that applies to all sales personnel is
based on sales commissions with a potential of 2-4% of specific sales according to sales goals.

Overall, this new plan has several positive effects on the company:
- Reduces cost of sales.
- Provides more security for representatives who are not ‘hunter’.
- Opens the door for a restructure of the organizational chart:
o E.g., since few reps are considered ‘hunters’ they could be under one sales
manager who perhaps is more experienced/specialized in this than others.
- By separating account managers and sales representatives, each position would now have
a more accurate job description. The activities and responsibilities that sales reps do are,
in part, different than the ones that an account manager does.
o Having an accurate description of the position would make it easier to establish
evaluation criteria for both. This then allows for the proper controls to be applied
and for more tailored motivational incentives as well.

While this new system makes sense according to the company’s growth goal, some problems
may occur if Bob goes ahead and implements it.
The main issue that Office Solutions Inc. will face is going to be employees’ dissatisfaction with
the change. We can already tell that employees might be against this change based on Bob’s
conversation with William (who would be considered an account manager). Here are potential
problems that could arise:
- While some employees are not generating many new clients, it does not mean that they
do not work hard:
o William is described as a very hard worker, the company’s #2 salesperson, selling
more categories of products and great at customer retention.
o He does not necessarily put in less effort than a ‘hunter’, so it is no surprise that
he is opposed to a system that reduces his pay.
o Could this provide an incentive to work less hard for employees like William?
- For some employees, this new job title might not align with their career goals. Some may
be less experienced sales reps who aren’t generating new clients because they lack some
experience and training. They may then look for work somewhere else because they want
to improve as salespeople. Could offering training be an option for the company so that
all sales personnel can get better at ‘hunting’.
- William wanted to remain a sales representative even though Bob warned him that there
would be a lot of pressure added to win new accounts.
All in all, here are Bob’s options:
- He could go ahead and implement the new system:
o He could offer a standard package to all account managers,
o Or establish different pay rates for account managers, depending on performance
or experience.
- He could keep the current system, and add pressure for sales representatives to bring in
new clients:
o Implement additional results control.
o Employees could be required to partake in trainings.

Conclude and Advise

The most important advice that Bob should follow, is to remain clear and transparent with his
employees. I do recommend that Bob implements the new system. First, he should collaborate
with HR and thoroughly review the performances of each employee to make sure that everyone
can be accurately categorized in one of the two groups. A pay grade system should be carefully
designed for account managers, based on experience and performance. I think this is important
and will be more widely accepted by employees than a standard salary for all. Sales
representatives are rewarded for their performance, so it seems fair that, in some way, the now
account managers still have some opportunities to stand out. While there is already 30% variable
compensation in the new system, the inclusion of different pay grades (or perhaps for the
variable compensation, a higher percentage commission could be available depending on the
individual) can make sure that employees who become account managers still feel valued and
that their work is recognized. It is important that communication is maintained through the
transition with employees so that they understand the nature of these changes. The company will
also need to implement different/new controls for account managers in order to keep them
motivated and efficient.