a material handling company pays each of its sale persons a base salary plus a percentage of revenue generated. To reduce overhead EFI has switched from giving each salesperson a company car to reimbursing them .35 for each business related mile driven. Accounting records show that on average each sales person drives 100 business related miles per day 240 days per year. Can you think of an alternative way to restructure the compensation of EFI’s sales force that could potentially enhance profits?
The only way to restructure the sales force's compensation is to (a) reduce their mileage rate, (b) reduce the number of miles driven by each employee in a year, (c) reduce their salaries, or (d) reduce their commission rates.
Profits could be enhanced if these employees weren't each required to drive 24,000 miles per year.
Yes, an alternative way to restructure the compensation of EFI's sales force that could potentially enhance profits is by introducing a commission-based structure. Currently, the salespersons are paid a base salary plus a percentage of revenue generated. Instead of reimbursing them for each business-related mile driven, EFI could offer a higher percentage commission based on the revenue generated by each salesperson.
This commission structure will provide an incentive for the salespersons to generate higher sales revenue as their compensation will directly depend on it. It aligns their interests with the company's profitability. Additionally, it eliminates the need for mileage reimbursement, reducing overhead costs.
Here's a step-by-step breakdown of the alternative compensation structure:
1. Determine the base salary: The company should establish a reasonable base salary that provides a stable income to the salesperson. This salary would be a fixed amount paid to each salesperson regardless of their sales performance.
2. Set the commission percentage: EFI should determine a competitive commission percentage, which is a percentage of the sales revenue generated by each salesperson. This commission rate can vary based on factors such as sales volume, target market, or product type. The higher the sales revenue generated, the higher the commission percentage.
3. Calculate earnings per sale: Multiply the sales revenue generated by each salesperson by the commission percentage to determine the commission earnings for each sale.
4. Track and assess performance: EFI should regularly track and assess the sales performance of each salesperson. This involves keeping records of the sales revenue generated by each salesperson and calculating the corresponding commission earnings.
5. Pay out commissions: At regular intervals, such as monthly or quarterly, calculate the total commission earnings for each salesperson based on the sales revenue generated. Add this commission amount to their base salary to determine their total compensation for the period.
By implementing a commission-based compensation structure, EFI can motivate its sales force to actively pursue higher sales revenue, potentially enhancing profitability.
To structure the compensation of EFI's sales force in a way that could potentially enhance profits, one alternative approach could be to implement a commission-based system. This would involve offering a higher percentage of revenue generated as the primary incentive for salespeople, rather than providing a base salary and mileage reimbursement.
Here's an explanation of how this alternative compensation structure could be beneficial:
1. Determine the base salary: EFI could set a competitive base salary that guarantees a minimum income for salespeople. This base salary should be reasonable and attractive enough to attract and retain talented sales professionals.
2. Establish a tiered commission structure: EFI can introduce a tiered commission structure that rewards higher performances with increased commission rates. For example, salespeople could earn a certain percentage for the revenue generated within a specific sales bracket, and a higher percentage for exceeding sales targets.
3. Set realistic revenue targets: EFI should establish realistic revenue targets for each salesperson based on factors such as market potential, historical data, and growth objectives. These targets should be challenging but attainable to motivate salespeople and encourage their performance.
4. Regular performance evaluation and feedback: Regular evaluation and feedback sessions should be conducted to review sales performance against targets and provide constructive feedback for improvement. This helps identify any areas where salespeople may need additional training or support.
Benefits of an alternative commission-based compensation structure:
1. Increased motivation: By tying a significant portion of their earnings to revenue generated, salespeople will be highly motivated to achieve and exceed their targets. This can lead to increased sales productivity and higher revenue generation.
2. Cost savings: Shifting away from providing company cars and reimbursing mileage expenses can result in significant cost savings for EFI. Instead, the focus would be on compensating salespeople based on their ability to drive revenue.
3. Alignment with business goals: A commission-based compensation structure aligns the interests of the sales force with the overall business goals of EFI. When salespeople directly benefit from increased revenue, they are more likely to actively pursue opportunities that align with company objectives.
4. Attracting top talent: A commission-based compensation structure can attract ambitious and driven sales professionals who thrive in a performance-based environment. This enhances the overall quality of the sales force, leading to improved performance and higher profits.
It's important to note that before implementing any changes to the compensation structure, EFI should conduct a thorough analysis of sales data, market conditions, and financial implications to ensure the alternative approach will indeed enhance profits. Additionally, seeking input from the sales team and involving them in the decision-making process can increase buy-in and promote a positive transition.