SALES COMPENSATION AT NIRALA

"What's Ramzan doing at Waris Road", asked the casewriter as he discussed some management
problems with Faisal Farooq in April 2000. "I thought he was the Store Manager at Jail Road, at least
last week when I went to meet him". The question was addressed to Faisal Farooq, son of the owner
Farooq Ahmad, and grandson of the founder of Nirala Sweets. Faisal, who was informally incharge of
operations at Nirala replied "Yes, you're right, but we have this system of scoring each shop and the
manager of the shop that stands last three consecutive months is transferred to the factory as a rule
and Ramzan is here because of that". "But I don't understand the purpose of just transferring the guy
to the factory" said the casewriter. Faisal heard a few more remarks and then said:

"These whole sales staff reward system was devised by an accountant several years ago and may well
be ready for revision. I think we need to take a detailed look at it and come up with a new system".
With that he asked an employee to bring in a scored sheet showing the ranking of the shops and
began to explain each item. He continued: "My desire is to make the salesforce something that is as
premium as our mithai, specially now that my expansion plans are taking off. Just look at Pizza Hut
and McDonalds; wherever you are in the world they smile, they're efficient and courteous, and they
all look the part. I don't see why we can't achieve something similar. And you know how close the
reward system is to my father's heart".

BACKGROUND

Taj Din started Nirala Sweets in Lahore in 1948 after he migrated from India at the sub- continent's
division into India and Pakistan. He was awarded some evacuee property on Fleming Road, in the
congested inner city, and was encouraged by a friend to start a Puri-halwa shop providing breakfast
to the many fruit traders who inhabited the adjoining area. He gradually introduced mithai
(sweetmeats) at the suggestion of friends and customers, which was an instant success. As the
shop's reputation spread outside Fleming Road, people from other areas of Lahore became
customers and sales showed a steady growth. With increasing congestion and accompanying parking
problems, business at the Fleming Road location appeared to have limited growth potential. In 1984,
Nirala opened another store in the suburbs of Lahore, on Jail Road, a relatively posh commercial cum
housing area. Sales grew immediately as most customers now found great accessibility to what was
generally regarded as Lahore's best mithai. Following Taj Din's demise in 1985, the management of
the venture passed to his son Mohammad Farooq who had been helping his father for several years.
Two younger brothers of

This case was written by Associate Professor, Wasif M Khan at the Lahore University of Management
Sciences to serve as a basis for class discussion rather than to illustrate either effective or ineffective
handling of an administrative situation. This material may not be quoted, photocopied or reproduced
in any form without the prior written consent of the Lahore University of Management Sciences.

Farooq also helped with the business but it was recognized that Farooq was now the man incharge.
This was not only because of his being the eldest, but also because he clearly demonstrated a
passion for the mithai business which his brothers did not necessarily share. They were still trying
their hand at different businesses ranging from trading to construction and admitted that the mithai
business was not socially appealing for them.

With the general populace of Lahore moving into many newer residential suburbs, three more stores
were opened over the next five years. There were located at Hafeez Centre in Gulberg, Moon
Market, Allama Iqbal Town, and Sadiq Pinza on the Mall, all relatively posh locales. Nirala
management felt that these moves were necessary to forestall any lost sales due to other shops in
these areas restricting Nirala customers from coming all the way to Jail Road. All the shops were
company owned, mainly to prevent being dictated to by landlords of commercial property. All mithai
was prepared at the company owned factory on Waris Road, about five minutes drive from the Jail
Road store. While the Jail Road store had office space, Mr. Farooq and his son Faisal who joined the
business in 1994 preferred sitting in the offices at the Waris Road factory.

Faisal was completing an MBA from a private business school but his father got Parkinson's disease
and thus Faisal left the MBA programme to manage the business. Faisal recognized that his father
had grown the business from one store to four by 1994 and was also responsible for many new ideas
such as the elegant packaging, which he had developed. Executives at the packaging company often
cited Farooq Ahmad as being a man with lots of new ideas often obtained from numerous visits to
industrial fairs abroad. However, Faisal had certain differences with his father regarding how the
business should be run. He eagerly wanted to improve the management of his company and bring in
some professional managers and systems. He had also taken a keen interest in computerizing the
record keeping and wanted all the stores to be networked with the factory and head office. Frisal felt
that the company needed to be modemized quickly and though his priorities were sometimes
different from those of his father, he often deferred to his father's wishes.

While there were many issues at Nirala that recdel attention, Farooq Ahmad was particularly
concerned about the motivation of his staff. Je beaved that the sales compensation system was to
blame for what he considered poor attitude and work habits. He had been urging Faisal to take a
fresh look at the compensation system and wanted him to link it to the company profits. Faisal too
wanted to make some changes but wasn't convinced exactly what to do. He was quite sure though
that the compensation could not be linked directly to company profits primarily for reasons of
financial secrecy. But he regarded the reward system as an important part of his overall objective of
improving the salesforce performance.

Markets and Products

Mithai was a traditional sweet mainly served on festive occasions such as Eid (the main Islamic
festival) or to celebrate important personal events such as a wedding, engagement, passing an exam,
promotion, or lately even the election cr removal of a political figure. Nirala management estimated
that almost 85% mithai was bought to present to someone rather than to be consumed by the
purchaser. This was particularly true cf the more common sale volumes i.e., one or two kilograms.
The larger quantities such as 50 or 100 kilos were intended for weddings and other such public
ceremonies. Apart from the wedding season and Eid causing demand surges, some days of the week,
specially weekends also caused sales to fluctuate. An important victory by the national cricket team
could cause similar sales peaks.

Though Nirala offered more than 50 varieties, mithai could be broadly classified as khoya (milk
cooked into a semi-dry form) based products such as barfi, gulab jaman, rasgulla etc, sugar based
such as jalebi, and milk based such as rasmalai which had to be stored and served cold. In the
opinion of one mithai salesman the majority of people believe that mithai is just sugar, khoya, and
ghee all mixed up but it was really much more than that. Careful ingredient selection, strict
preparation procedures and proper transportation and storage were critical in ensuring that mithai
retained its appearance, flavour, freshness, and shape. Virtually all the mithai producers of Lahore
bought all the ingredients from suppliers who were from the informal sector. Most of the mithai sold
at Nirala's stores was usually sold the same day it was prepared except where some setting time may
be required or where the flavour was not adversely affected by storing for a couple of days.
Though the basic recipes ar preparation techniques for mithai had not changed over several decades,
innovations had occured in the packaging, the size of the mithai, and the appearance of the stores.
Most of these innovations were introduced by Nirala. By the year 2000 mithai buying was a markedly
different experience from that thirty years ago. At that time customers stood in sweltering, dimly lit
stores and came away with mithai packed in a rough, leaky cardboard box tied with a coarse brown
string to keep the lid in place. The mihai fans of Lahore patronised either Nirala on Fleming Road or
Amritsari located near the Mall, the main city thoroughfare that offered good parking and access.

Between 1975 and 1999 several new mithai shops opened in Lahore scene, including a couple with
more than one shop. Several popular bakeries also started offering mithai along with baked products
and common grocery items. Though Nirala management and mithai aficionados felt that Nirala still
offered the best mithai in Lahore in terms of quality and variety, some new entrants were competing
on the basis of significantly lower prices. Nirala salesmen reported anecdotes of several customers
being concerned at Nirala's high prices.

Apart from competition from many new entrants, the growing westemisation and health awareness
among some segments of the populace also seemed to be impacting mithai sales. Some buyers had
switched to presenting cakes rather than mithai on festive occasions for reasons that had not been
well researched, but were generally associated with the desire to appear modem.

Almost none of the major players in the Lahore mithai maricet indulged in any sort of advertising or
promotion. Word of mouth was recognized to be the only and in the opinion of some, best form of
advertising. While quality was regarded as an important variable in mithai sales, Nirala had
introduced some improvements such as high quality packaging, mithai salesmen wearing disposable
gloves while handling mithai, air-conditioned and well appointed stores, in-store microwaves for
catables such as samosas which are to be served hot, and special individual packing for small
quantities of mithai that had to be distributed individually on occasions such as that on weddings or
engagements.

Nirala Operations

All mithai was prepared at Nirala's Waris Road facility. Production was organized under four kitchens
depending on type of mithei i.c barfis and other khoya based mithai in one, jalebis in another and so
on. Each kitchen was headed by an ustaaad who supervised several kaarigars. Production involved
one or more of the following operations: kneading khoya, sugar and other ingredients into shapes
appropriate for deep frying, cooking, garnishing with almonds etc., cooling, cutting (if required),
immers ng in sugar syrup (gulab jamans), packing in steel trays and then transporting to the Nirala
stores where the trays were placed in display racks. Mithai could be prepared in one to five hours,
depending on its type though some mithais had to be allowed to set for a couple of days before they
were ready for sale. The packed trays of mithai were then transferred to the Supply Department
awaiting transport to the stores in company vans.

Nirala Stores

By late 1997, Nirala had four retail stores of different sizes and staff strength located in different parts
of the city. In mid-1999 Nirala had opened its first store outside Lahore. This was located in Pakistan's
capital, Islamabad. See Exhibit 1 for a sample of store statistics. The stores carried basically the same
product mix whica was sent fresh in company owned vans from the factory at Warris Road a couple
of times per day or as needed. The completion of Pakistan's first motorway from Lahore to Islamabad
had even made delivery to the Islamabad store possible in four hours from Lahore. All the stores had
been designed to project a quality image and salesmen wore gloves and used tongs to handle mithai.
They also wore standard uniforms and identification cards, rather unique features for a traditional
mithai business. The Islamabad store presented a very high-tech look, something many customers
found pleasantly surprising.

The stores were each headed by a Store Supervisor. All the store suupervisors had been with Nirala
for several years. They usually started with menial jobs such as washing utensils, cleaning kitchens,
packing etc, then moved on to become salesmen, and later cashiers. The cashier's job was highly
regarded because as one Store Supervisor said, "This shows how much the owners

trust me".

The Store Supervisor's job involved placing the daily demand for the amount and variety of mithai
needed at the store. This was usually done the prior night, though sometimes, depending on sale
and shelf capacity at the stores demand was placed during the day and resulted in up to four
supplies from the factory. Large order customers some of whom expected overnight service also had
to be handled by the supervisor. He also had to ensure that the customers were politely handled and
proper procedures had been followed in selecting and packing mithai. Sometimes, customers had
specific questions about the ingredients of a particular mithai, which a salesman was unable to
answer and thus had to be handled by the supervisor. All other administrative tasks related to store
management were also under the supervisor's control.

In addition to the Supervisor and salesmen, each store had two cashiers who shared the day's duty.
The cashier's job was considered to be quite important by Nirala management as it required some
dexterity in operating the electronic cash register and ensuring that proper cash had been paid and
change returned to the customer. The cashier was also responsible for counting the cash while
handing over charge to the next cashier. Usually, one of the salesmen was trained for the cashier's
job. Since the job paid about 15-20% higher salary most salesmen also regarded it as a prize position.
In case of any problems, the Store Supervisors were all trained in handling the cashier's tasks.

Evaluation and Compensation

The store and factory staff's compensation package comprised a basic salary, a commission and a
prize. Exhibit 2 shows an example of the monthly compensation paid to sample staff at one store (Jail
Road). In Faisal's opinion, salaries for new employees were quite random and, like the raises,
depended very much on the personal whims of one of the three owning brothers or a close relative.
The process for the other stores was quite similar to the example shown. Most of the staff employed
at Nirala had been referred by in existing employee, a family member, or a friend. There were four
salary grades, 1 through 4 shown in Exhibit 3. In addition to the basic salary, cach employee was
given Rs 6 per day for on-time arrival at the job. Those who did not take any leave were paid the
equivalent of 2.75 days salary for working during the month. All calculations for salary, commissions,
annual leaves, on time payments, and prize money were done by the Accounts Department at Waris
Road. Faisal did not hide his view of the Accounts Department's quality of work:

I don't trust one number that goes in or out of that department. I'm unable to get any report that
makes sense and when you look at the way the prizes are being distributed you'll understand that
the gaming by the Store Supervisors must be accompanied by gaming by the Accounts staff.

The Commission

The commission was based on the company wide sales achieved every month. The commission
amount was paid at 2% of net sales to all staff at the sales cutlets, the factory, the office and even
those who worked at the owner's house. The total commission was divided proportionately by the
Grade in which an employee was placed. For example, a Grade 2 employee received twice the
amount of commission compared to a Grade 1 employee and similarly a Grade 3 employee received
three times the amount. The formula for calculating bonus payments for a store's salesmen is shown
in Exhibit 4. Individual bonus payments to salesmen were adjusted for the number of days they had
been present and if a salesman did not report for duty at his store he would lose that day's bonus
payment. In addition, he would lose the entire week's bonus in case he did not show up on Saturday
or Sunday since the stores were much busier those days.

The Prize Money

Apart from the commission paid to each staff member (excluding the owners) for overall company
performance, there were special incentives for individual effort and for store performance. Individual
salesmen were rewarded with a cash incentive of Rs 1,000/- for making the maximum sale each
month among salesmen at each store. Each salesman was assigned a code that had to be punched in
as the sale was entered in the cash register. At the end of the month the salesman with the greatest
sales in value would be judged the best salesman and paid the Rs 1,000/- cash prize. In reality
however, the cashier or the manager attributed sales to salesmen in a manner such that at the end
of each month a different salesman would stand first in cach store. The entire sales staff at each store
agreed with this arrangement, and the store supervisor and cashier did it with their full approval.

Similarly, the Supervisor of the best store each month evaluated along the dimensions shown in
Exhibit 5 would be given a cash prize of Rs 1,000/-, the second best store's Supervisor a prize of Rs
800/- and the third best store's Supervisor a prize of Rs 6004. This would just leave one store whose
manager did not get a prize that month. This too was gamed by the store managers in connivance
with the Supply and Accounting staff to show a different store winning each time. The cashiers were
also awarded first, second, and third prizes based on the amount of cash handled during their shift.
Here again, it was normal for a regular pattern of different cashiers winning the prize.

The quantitative part of the store evaluation was handled by the Accounts Department at the Head
Office, which compiled the performance statistics and came out with a ranking. For the qualitative
part, the company sent a staff member from the main office to personally visit and evaluate the
stores at least a couple of times each month. Each store would be rated from best to worst on all the
measures in Exhibit 5. The best store would get 3 points, the second best 2, the third 1 and the last
zero. The totals would then determine the best store.

Apart from all the systematic rewards, Farooq Ahmed sometimes declared a day's bonus salary if the
Pakistan cricket team won an important match. Sometimes he would send the more senior
employees on Hajj at the company's expense. It was also not unusual for some employees to ask him
or one of his close relatives for a loan. More often than not he was known to look kindly upon these
requests, specially in case of employees who had been at Nirala for a long time.

Store Supervisor's Impressions

In evaluating his job as Store Supervisor and the Salesmen compensation, Tasavvar, the Supervisor of
the Hafeez Center, Gulberg, store said:

I joined after I responded to a P.O Box ad placed by Nirala. Started as a salesman in Jail Road. Next
month they made me telephone operator and for a year I just attended telephones at Jail Road. I
used to carry out orders immediately and Haji Sahab (Farooq Ahmad's younger brother) liked that
and raised my monthly salary to Rs. 1,900 from 1,600/-. Then I was a salesman at Jail Road for a year
and became a cashier for about a year and a half. Then they had to accommodate some sifarashi and
I was back as salesman. However, the chap used to make lots of errors and just go away from the job
and I was again made cashier. I took a 6 day leave, the maximum leave I've ever taken to go to
Karachi and when I returned I was informed at the gate that I am now the Store Supervisor at Hafeez
Center. The manager can do a lot. I can't afford to lose temper with any salesman. I've told them they
can't be rude even if the customer is unreasonable. Apart from this I need to order the stuff
depending on the day of the week so it can be fresh in the moming and do all the other control jobs
at the store.

They (the management) have made it someone's duty to check the packaging and wastages and to
come inspect the store for the store performance report. Though there is no clear person specified, I
know when he has to come so one can easily clean up the store 5 minutes before he

arrives.

I don't see why the commissions are based on company sales. They should be based on store sales;
after all, why should our commission go down if someone else is not doing well. The overall reward
should be increased but it must be based on store sales.

Ramzan, the former Supervisor of the Jail Road store featured in the case opening, who had just
been transferred to the factory said:

I started by emptying vans, opening boxes, and making cartons and then became a salesman at Jail
Road. After 3 months I became cashier. In the owner's opinion trust is vital for the cashier, besides
people also think this person is honest that's why they made him the cashier. After three years or so I
became the supervisor and I have served as Store Supervisor at Jail Road, then Moon Market for
about 3 years...it's the closest to my house, and Sadiq Plaza for about 6 months prior to the last 4
months at Jail Road again. I've been transferred to Waris Road because of low sales the last three
months. I try to do my job well, to increase the sales, to look after the customer but maybe they
don't like the price. It may not be a problem for the other stores but I have Fazal Sweets selling
mithai at Rs 90 per kg. very close to Jail Road.

I know the evaluation system as does every Store Manager. I don't think any evaluator sent by the
owners is unfair. He checks everything but he doesn't tell me how many points I got after cach visit.
Most points are lost because of poor sales. I don't know when he will come or who will come. Sales
of course are known each day but the computer in the Headquarters generates it. When they're
adding in the computer we don't know what errors they may have made. We do know what we've
sold from the cash we have.

The person sent to replace Ramzan at the Jail Road Store, Abdus Salam, had come from the factory,
but had served as store supervisor at another store previously. Abdus Salam thought the idea of
sending a store supervisor to the factory was quite a good one since it allowed one to truly
understand operations and think about all the operational impacts of one's decisions as a store
manager.

Abdus Salam, in the casewriter's view seemed more assertive than Ramzan and in response to the
casewriter's opinion about excessive manpower at the Jail Road store said "Yes, when I used to be at
Jail Road there were nine people there, now there are nineteen. Plus, everyone seems to come and
use the phone at Jail Road and all the free orders for the police and bureaucracy also have to be sent
from Jail Road. So its a much more difficult operation to control than the others. And I think the
bonus should be related to each store's performance rather than to the total company scles".
Depending on the location of the store, managers attributed different reasons for relative decline in
sales with some supervisors claiming that Nirala's prices were too high while at least one supervisor
(Hafeez Center Gulberg store) said he couldn't cite even one instance of a customer ever mentioning
price. As another example, the Jail Road store supervisor thought his sales were falling because of
the opening of Fazal Sweets about three kilometres away. Fazal Sweets, which had built up a good
reputation just selling barfi in the inner city had ventured out into the suburbs with a location
offering mithai at Rs 90 a kilo though his product line was quite restricted compared to Nirala's. The
Jail Road supervisor claimed that his customers were being attracted to Fazal in large numbers even
though some had recognized that Fazal's mithai was clearly inferior to Nirala's.

At each weekly review meeting conducted by either Farooq Ahmad or by Faisal the issue of declining
sales would come up without any resolution. All the sales supervisors and the Head Office staff
would get together once a month to hear the prizewinners for the month. It was observed by the
casewriter that almost none of them had any real interest in the multiple criteria scorecard as it was
projected on to a screen. Farooq Ahmad believed that if the entire compensation or at least the
commissions were linked to profits rather than sales, the staff would be much better motivated.
Faisal advised him that they ought to do some careful analysis of the options before changing the
evaluation and reward system at Nirala.
 SALES COMPENSATION AT NIRALA

Nirala Retail Store Statistics

Location Area in Sq. Ft Typical Staff Strength Average Monthly Sales (Rs. in Million)

Jail Road 1,450 9-15 1.2

Hafeez Centre 900 6-8 1.0

Moon Market 604 4-5 0.4

Sadiq Plaza 480 4-5 0.4

Islamabad 800 6-8 0.3

Exhibit 2

SALES COMPENSATION AT NIRALA

Compensation Components for Sales Staff at Jail Road Store

Name Grade Years of Monthly Sales On-Time Annual Monthly Salary

Service Commission (Rs.) Leave (Rs.)

Bashir Tiger 2 17 600 156 142 1,600

Abdul Razaq 2 17 742 168 133 1,500

M. Boota 2 4 550 114 60 1,200

Saleem 2 4 800 186 88 1,000

Hameed

Zulfiqar Ali 1 1 260 144 71 800

Exhibit 3

SALES COMPENSATION AT NIRALA

Salary Grades in Nirala

Grade Rupees per month

I 600-1,200

2 1,200-2,000

3 2,000-3,000

4 3,000 upwards
 Exhibit 4

SALES COMPENSATION AT NIRALA

Sample Calculation of Sales Commission

1. Company sales this month =Rs 3,000,000

2. Total commission amount at 2% =Rs 60,000

3. Total employee strength and grades Grade 1 equivalents

(Number of employees x Grade)

Grade 1:22 22x1=22

Grade 2:20 20x2=40

Grade 3:10 10x3=30

Grade 4: 8 8x4=32

Total 124

4. Grade 1 Share= 60,000/124 = Rs.484/-

Commission earned by sales at Jail Road

Grade No. of Employees Grade 1 Equivalent

Grade 1 1 1x1=1

Grade 2 3 2 x 3 =6

Grade 3 2 3 x 2 =6

Grade 4 0 4 x 0 =0

Total of 13 Grade 1 Equivalent Employees

5. Total commission payable to Jail Road sales =13/124 x 60,000-Rs. 6,290/-

Staff

Standard Commission for Division of Rs. 6,290/- at Jail Road

Grade employee Rs. 484/- Rs. 484/- (1 Grade 1 employee)

Grade 2 Employee Rs. 968/- Rs. 2,904/- (3 Grade 2 employees)
Grade 3 Employee Rs. 1,452/- Rs. 2,904/- (2 Grade 3 employees)
Grade 4 Employee Rs. 1,936/- Rs. 0/- (0 Grade 4 employee)
Total commission payable at Jail Road Rs. 6,290

Note: Full Commission only payable for full month attendance.

 Exhibit 5 (page 1 of 2)

SALES COMPENSATION AT NIRALA

Scoresheet for Grading Retail Outlets

1. Percentage increase/decrease in sales (present month vs. same month last year)
Increase/Decrease

Increase/Decrease

2. Percentage increase/decrease in sales (present month vs. previous month)

Increase/Decrease

3. Increase/decrease in weight sale since same month last year

Present

Past

Increase/Decrease

4. Increase/decrease in weight sales since last month

Present

Past

Increase/Decrease

5. Comparison of increase/decrease in sweets (profit description)

Sweets in weights

Supply

6. Tumover

Increase/Decrease

7. Countable Sweets

Supply

Turnover

Increase/Decrease

8. Sweets Return (Sale basis)

9. Least percentage of sales return from stores
i) Sheera
ii) Choora
10. Least usage of box packing
11. Least usage of packing material
12. Monthly labor expenses
13. Electricity expense
 Exhibit 5 (page 2 of 2)
SALES COMPENSATION AT NIRALA
Scoresheet for Grading Retail Outlets

14. Telephone expense

15. Miscellaneous expense
16. Individual sales weight
17. Least percentage of discounts.
18. Total dispatched weight
19. Personal taste sweets' weight in box sales (sweets chosen by customer rather than standard 1
kilogram or 2-kilogram mix, which is chosen by the salesman)
20. Per unit cost
21. Number of mistakes by cashier
22. Comparison of percentage increase/decrease in # of customers
Present
Past
Increase/Decrease
23. Level of cleanliness of floor
24.Level of cleanliness of show-cases
25.Quality of packing
26.Standard of packing
27.Customer's complaints
28.Cleanliness of salesman
29. Standard of reporting
30. Computer capabilities