Sales management

UVA-M-0425

This case was prepared by Derek A. Newton, John Tyler Professor of Business Administration, and revised in 2003 by

Alexandra Ranson (MBA ’04), under the supervision of Robert E. Spekman, Tayloe Murphy Professor of Business

Administration, as the basis for class discussion rather than to illustrate either correct or incorrect handling of an

administrative situation. As all data have been disguised, this case should not be used for research purposes. Copyright

© 1993 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order

copies, send an e-mail to [email protected] No part of this publication may be reproduced, stored in a

retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,

photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 7/04.

MADISON FIBER CORPORATION

Early in February 2000, executives of the Madison Fiber Corporation of Baltimore,

Maryland, were discussing some proposals to modify the company’s sales-force compensation

plan. The discussion had been prompted by the recent broadening of the product line and by

widespread disenchantment with the current compensation plan, a straight salary system with an

annual bonus set by means of subjective evaluations. Furthermore, Madison executives had

recently reorganized the sales force. They believed that, if changes in compensation were to be

made, now was the most appropriate time to make them.

Company and Industry Background

Madison produced synthetic fibers, yarns, and fabrics. The company was founded in 1955

to serve a rapidly changing carpet-manufacturing industry. Subsequent to its founding, the firm

made several major breakthroughs in synthetic fiber technology and production. These advances

enabled Madison to become a significant supplier of synthetic carpet fiber as well as to make

competitive entries into related fields.

Madison’s three major product lines were synthetic carpet fiber, yarn, and industrial fabric.

Madison’s synthetic carpet fiber—a monofilament—was used by leading carpet mills that

produced tufted and needle-punch carpets for commercial and residential use. The company

manufactured synthetic yarns by twisting monofilament synthetic fibers into multifilament and

ribbon styles for a variety of applications, such as webbing in aluminum lawn furniture, grilles on

high-fidelity speakers, and automobile seat covers. By weaving the yarns, the company

manufactured industrial fabrics used as bagging for products like seeds, beans, fertilizers and

minerals, and sheeting for such applications as tents, swimming-pool covers, industrial wraps, and

tarpaulins. Because monofilament fiber was the base material for carpet fiber, yarn, and fabric,

companies competing in any one of those markets tended to compete in others as well.

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Madison executives expected competitive pressure from industry overcapacity to become

intense by the end of 2000. They ranked Madison fifth among its competitors in manufacturing

capacity and estimated that the largest firm in the industry was four times Madison’s size. Selected

market estimates, forecasts, and sales data for carpet fiber and other Madison products are shown in

the table below.

Actual Forecast

Sales Volume (000s of pounds) 1998 1999 2000 2001 2002

Carpet-fiber industry (est.) 1035.2 1097.8 1119.8 1142.2 1165.0

Sales value ($000s) 1998 1999 2000 2001 2002

Madison carpet-fiber sales $106.1 $109.3 $115.8 $122.8 $130.1

Madison market share (est.) 10.5% 10.6% 11.0% 11.6% 12.2%

Madison yarn sales $51 $54.9 $67.7 $83.0 $102.7

Madison fabric sales - $3.1 $15.3 $16.9 $18.5

Madison total sales $157.1 $167.2 $198.8 $222.6 $251.4

The carpet fiber market

For many years the dominant materials used in carpet manufacturing were of natural origin

such as wool. During the 1960s, synthetic fibers began to take a larger share of the market.

Madison and its competitors moved quickly to increase their capacities for manufacturing synthetic

fiber. After stagnant sales in the early 1990s, in 1997 and 1998 the carpet-manufacturing industry

experienced strong sales growth, and many firms were at or approaching full capacity. Madison

executives believed that the period from 1999–2004 might promise a 4 percent annual increase in

industry sales. Accordingly, using 1995 capacity as the base of 100, Madison executives were in

the process of adding capacity to increase this figure to 115 by the end of 2000 and to 155 by the

end of 2004. Most carpet customers (with a few notable exceptions) were located in the South with

the majority in or around Dalton, Georgia.

The yarn market

Because of the many potential applications for synthetic yarn and fragmented industry data,

company executives could not estimate potential sales volume or Madison’s share of the synthetic-

yarn market. Company executives believed that Madison’s sales were limited only by its ability to

create customers and by available machine time. The company backlog of firm orders extended

into the middle of 2000. The available data indicated to company executives that Madison had a

small and spotty share of some of the applicable markets for synthetic yarns in 1999. For instance,

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they estimated they had 8 percent of the grille cloth market, 15 percent of the static automobile

seat-cover market, and 8 percent of the declining market for lawn-furniture webbing. Most of

Madison’s yarn customers were located near Chicago or other large industrial cities. Many

potential yarn markets and customers were not being covered at all.

The industrial fabric market

Because executives had waited to develop truly superior products, the firm was late in

entering the industrial-fabric market. Madison fabric products were introduced during the last

quarter of 1998. Demand for this material was so great in 1999 that the company was able to sell

all of its limited production. There was no discernable geographic pattern among potential fabric

customers.

Madison’s Marketing Activities

Madison was organized into four departments: marketing, finance and administration,

operations, and research and development. Each department was headed by a vice president, who

reported to the company president. Three of the departments employed fewer than 60 people;

operations employed more than 400. Reporting to the vice president for marketing were a

customer-service manager, a sales manager, and three product-development managers (one for

carpet fibers, one for yarns, and one for industrial fabrics).

The customer-service manager handled telephone contacts with customers, solving

customers’ billing, delivery, and technical problems. She also served as an “inside” sales

representative, referring sales leads and requests for product information to the appropriate sales

rep. These inside sales activities, however, were always credited to the sales rep assigned to the

account.

The product development managers helped sales reps and customers solve technical

problems; analyzed the current and potential market for their products; suggested product-

development or line-extension opportunities; developed specifications for new and proposed

products; and forecasted demand for new, existing, and proposed products by making appropriate

economic and profit analyses. The product-development managers were expected to be technically

expert with regard to customers’ manufacturing techniques, as well as familiar with the market

place and likely prospects for new and existing product offerings. Unlike a typical “brand

manager,” the product-development manager had no responsibility for sales volume or profits.

The sales manager developed sales plans by product, territory, and account and also

directed the sales force. The current sales manager had been promoted to his present position in

January 1999, after ten years as a Madison sales rep. He was 42, a college graduate, and earned

about $90,000 a year in salary and management bonus.

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Because the equipment used to manufacture synthetic fibers, yarns, or fabrics represented a

substantial capital investment, the company’s basic business strategy was to attempt to operate at

full capacity (normally two shifts) at all times. Fluctuations in the consumers’ demands for

carpeting and competitive or technological developments, however, often created undersold or

oversold conditions.

Capacity-forecasting and profit problems led Madison executives to take steps to reduce the

firm’s heavy reliance on the carpet-manufacturing industry. Accordingly, they decided in 1997 to

broaden research and development in yarn and fabric areas for other industries. In 1998, Madison

diversified into industrial fabrics and began a marketing strategy to increase the proportion of sales

of products other than carpet fiber.

In the carpet market, Madison’s new strategy was to increase its share of business with

high-volume accounts where it could become the primary supplier. Historically, Madison had been

the secondary or tertiary supplier in such accounts, a condition that exacerbated the cyclicality of

the business. A second objective was to reduce dependence on small accounts whose positions in

the market place were marginal from the standpoints of credit and potential growth.

In the yarn market the strategy was to find new applications that would appeal to

manufacturers with high poundage or high square-foot requirements. New customers had to be

found beyond manufacturers of furniture, automobile seat covers, and grille cloth. Applications

that would not generate significant volume were considered unattractive because of their low

margins.

In the industrial-fabric market, the strategy was to provide improved material and new

applications in volume for customers who were using or were likely to switch to superior synthetic

fabrics in some of their present or new end products. Examples of such products were specialty

bagging (sacks, bales, bags), swimming-pool covers, tenting, tarpaulins, and industrial product

wraps. Management estimated that much of the domestic market was concentrated in 100 large

potential accounts. Major marketing efforts were to be undertaken at first, however, with only the

largest potential customers with high-volume applications. This strategy required a very high

investment in weaving and coating equipment. Madison was obliged to take on heavy debt to enter

this capital-intensive business.

Sales and Sales Management Activities

The job of the Madison sales reps was multifaceted. First, they were expected to service

Madison accounts and obtain orders for all Madison product lines. By virtue of personal

acceptability and technical competence, they were expected to assist customers in determining

appropriate inventory levels, to monitor and correct possible problems regarding the quality of

delivered products, to monitor and correct Madison’s delivery service, to handle complaints, and to

serve generally as on-the-spot trouble-shooters.

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Second, the sales reps were expected to increase the proportion of business that Madison

was obtaining from each account. Because most larger companies, particularly those purchasing

carpet fiber, preferred to purchase from several sources, it was important that the sales reps

penetrate past the customer’s purchasing office and become influential with all important decision

makers within the customer’s operation.

Third, the sales reps were expected to work closely with the product-development managers

to seek new applications for existing products and extensions of the product line and to introduce

new products to present and potential customers. In effect, between working with accounts and

developing a close liaison with the product-development managers, a good part of the sales reps’

jobs was to manage relations between the Madison plant and its customers.

Fourth—and increasingly important given the company’s efforts to reduce its dependence

on carpet-manufacturing customers—the sales reps were expected to prospect for new accounts for

yarns and fabrics. They were responsible for generating leads by observing, listening, reviewing

such sources as the Thomas Register, and following up inquires forwarded from the customer-

service manager.

Thus, sales reps were required to call upon many different kinds of customers, ranging from

large carpet manufacturers to small grille-cloth weavers to industrial-packaging firms. They could

experience considerable difficulty in determining who and where the likely prospects were for a

number of quite different product applications. Finally, the company’s marketing strategy was still

in the process of evolving, forcing sales reps to tailor their activities by industry and by geographic

area.

Late in 1998, the sales organization had been reduced from two regional managers

supervising 14 Madison sales reps and four commission agents to a single sales manager

supervising 12 sales reps. This action had been taken after a detailed study of the sales reps’

activities had revealed that the sales force was underutilized. As a consequence, each territory had

been studied to determine the optimum number of calls per day from a well-planned itinerary.

Each current account was analyzed to determine how many calls per year were required to cover

the desired amount of service and selling time. A similar procedure was undertaken with respect to

current and potential prospects. This analysis produced the current territory assignments and a

concomitant increase in the number of required and actual sales calls per week. As Exhibit 1

shows, the dollar sales for 1999 were similar among the sales territories, except for the Atlanta

territory with its large concentration of carpet manufacturers.

The current sales reps had been with Madison from four to twenty years. They had been

hired as experienced sales reps and their ages ranged from 33–52. The company had no formal

training program beyond a two-week tour in the plant to gather technical knowledge and a two-

week tour in the field with an experienced sales rep to “learn the ropes.”

In 1999, in recognition of the sales manager’s increased span of control, three control forms

were instituted to monitor the field activities of the sales force. The first was a weekly itinerary

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submitted by the sales rep to the sales manager. It listed the sales rep’s planned calls by account

and by day. It was faxed to the sales manager on Friday to cover the following week. The second

form was a trip report, which the sales rep filled out after each call. The sales rep listed the

account’s name, persons contacted, purpose of the call, results of the call, whatever marketing

intelligence he or she had gathered, and whatever follow-up action should be taken by the sales rep

or by the Madison plant. For a serious complaint, the sales rep was required to fill out a complaint

report in seven copies, which were routed to various departments within Madison, depending upon

the nature of the complaint. This form was also used to request price adjustments and to advise

other Madison departments of problems with service, billing, pricing, delivery, and quality control.

The sales manager tried to maintain personal contact with each of the 12 sales reps by

telephone at least once a week. His objective was to spend two and one-half to three days a week

in the field working with the sales reps and calling on customers with them. This schedule

permitted him to work in the field with each sales rep for two or three days in each quarter. An

annual sales meeting, usually held in February, brought all the marketing and sales personnel

together in Baltimore. This meeting, a combination of social and business activities, was the

company’s major opportunity to inform the sales force of technical developments in the Madison

product line and to review marketing plans.

The sales manager conducted a formal performance review with each sales rep at the end of

the year. The review took place either in the field or during a sales rep’s visit to the Madison plant.

The vehicle for performance appraisal was a two-page sheet that provided space for the sales

manager to write a subjective appraisal and developmental action plan in each of six areas:

technical knowledge, quality of work, quantity of work, initiative, relations with Madison

personnel, and office procedures. These criteria were used throughout the company, and the form

was standard for all departments and for all nonmanagerial employees.

The current compensation plan for the sales force paid a straight salary that, in 1999,

averaged $62,000, plus a year-end bonus ranging from $5,000 to $7,500 per person. The size of the

bonus depended on the collective subjective judgments of the sales manager, the marketing vice

president, and the president. Seldom, according to the sales manager, was the size of the bonus

related directly to sales dollars produced. In addition to earnings, the sales rep received all normal

fringe benefits, plus a company car. He or she was reimbursed for all normal business expenses

after submitting a monthly expense report.

The Compensation Issues

The first problem that senior executives had to deal with was the appropriate amount of

compensation. Madison executives estimated that the average sales rep’s earnings in the industry

were approximately $75,000 a year (including company car), although sales reps for two of

Madison’s larger competitors probably averaged about $90,000 a year. Earnings for the top sales

reps in the industry appeared to be earning in the neighborhood of $100,000 to $125,000 a year.

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The sales manager recognized that Madison sales reps’ earnings were close to the industry

average. But he argued that, because it was a small company relative to its major competitors,

Madison should pay more than average compensation in order to attract and keep the best possible

sales reps. The controller argued that, because turnover was almost nonexistent, there was no need

to pay Madison sales reps more than they were already getting.

The second issue was the method of compensation. Firms in the industry exhibited

considerable variety in methods of compensating their sales reps. Two of the large firms paid

straight salary only. Some smaller companies used commissioned agents who paid their own

expenses from a commission rate of 1½ percent of their sales. Most of Madison’s competitors,

however, used a salary system with some form of bonus payment. Each of these methods had its

adherents within Madison.

The president indicated that the decision of how the sales reps were to be compensated

would be left up to the sales manager, the marketing vice president, and the company controller.

He placed two constraints on their decision, however: (1) no sales rep doing a good job should

suffer financially from a change in the pay plan; and (2) if a bonus system was instituted, no sales

rep could earn more than 50 percent of his or her salary in bonus, because the Madison managerial

bonus plan had the same limit.

Accordingly, the marketing vice president, the sales manager, and the controller met to

discuss the options they had studied over the past six months. These options are described below.

Straight salary

The controller advocated paying sales reps a straight salary and basing future salary

adjustments on past performance. He argued that a straight salary would give managers tight

control over the sales reps’ order taking and account servicing. Because much of the sales reps’

success depended upon their ability to bring the internal resources of the company to bear on the

solution of customer problems, the “credit” for the sale belonged to everyone in the Madison

organization. Furthermore, much of their business was “handed to them on a silver platter” and

was not a direct consequence of their individual initiative.

The sales manager disagreed. He maintained that straight salary gave sales reps no

incentive to develop new business or to increase business with current customers, and that these

objectives were the real focus of their efforts. He added that both these activities were critical to

the success of the company’s strategic shift in product and customer emphasis. Furthermore, he

maintained that salary adjustments would be determined by the same subjective evaluations that

made Madison executives uncomfortable in determining bonuses under the current system.

Continuation of current plan

The major argument for continuing the present plan was based upon the marketing vice

president’s idea that “the devil you know is better than the devil you don’t.” He maintained that the

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current system had the advantages of familiarity and control over unexpected events. He

recognized, however, that the current plan was favored neither by the sales reps, who had been

complaining about the subjectivity of the bonus determination, nor by the sales manager, who was

particularly uncomfortable when explaining to the sales reps the basis for these subjective

judgments.

Straight commission

Straight commission was the plan favored by the sales reps. The commission rate under

discussion was 0.6 percent of sales, paid monthly. The sales reps argued that they would be

inclined to work harder if they were treated “as if they were in business for themselves,” and that

their efforts to maximize their own incomes would maximize the achievement of company

objectives. The controller pointed out to the sales manager and the marketing vice president that

straight commission meant that, as the firm grew and increased its efficiency, it could never

improve its ratio of sales to cost of selling. The marketing vice president expressed the opinion that

he did not want the sales reps “in business for themselves.” He wanted them “working for

Madison.” The sales manager sympathized with both of these reservations, but he thought that

straight commission might make his managing job easier because he would have to do less

“booting them in the tail.”

Salary plus annual bonus based on product-line sales

The sales manager proposed an annual bonus based on product-line sales “over quota.” He

favored establishing quotas for each sales rep for each major product line—carpet fiber, yarn, and

industrial fabric. At 100 percent of quota for each product, sales reps would receive no bonuses,

but for each 3 percent in excess of quota for each product line, a sales rep would receive a bonus of

1 percent of salary. Thus, if a sales rep exceeded his or her personal quota for each of the three

product lines by 9 percent, the annual bonus would be 3% + 3% + 3% or 9% of salary. The

maximum bonus would be 50 percent of salary. The annual bonus would be supplemented by a

one-time award given for each new account to equal one-tenth of 1 percent of the new account’s

first-year sales, with a maximum payment of $600 per account. This payment would be made as

soon as possible after the anniversary date of the new account’s first order.

The controller was less than enthusiastic about his plan, maintaining that the quotas might

be set too low, resulting in overpayment to the sales reps. He also wondered about the effects of

windfall sales. The marketing vice president wanted to know how the sales manager planned to

make the quotas fair, because sales in the past had sometimes been limited by plant capacity.

Salary plus quarterly bonus based on “capitalized sales expense”

One of the product managers had passed along to the marketing vice president an article

describing the “capitalized sales expense” approach to compensation. This method required that

managers first determine the sales expenses that they were willing to incur. This expense was

expressed as a percentage of sales. The salary and controllable expenses incurred by a sales rep

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were then divided by this percentage. The resulting amount, called a “bogey,” was to be used as a

dollar sales quota. The sales rep would receive a bonus for sales in excess of the bogey. The bonus

would be set at a fixed percentage of these excess dollar sales, at a rate below the figure for the

desired sales expenses, expressed as a percentage of sales. No bonus could exceed 50 percent of a

sales rep’s salary.

The marketing vice president was intrigued enough by this idea to calculate some

percentages illustrating it. He set desired sales expenses at 1 percent of sales and set the bonus at

0.5 percent of sales in excess of bogey. He then figured the quarterly bonus for a sales rep who

earned a salary of $18,000 for the three-month period, made $2,700,000 in sales, and incurred

$6,000 in expenses during the same period.

3 month’s salary + 3 month’s controllable territory expenses = Bogey

0.01

(3 month’s sales - Bogey)  0.005 = Bonus

$18,000 + $6,000 = $2,400,000 = Bogey

0.01

$2,700,000 - $2,400,000 = $300,000 (sales in excess of bogey)

$300,000  0.005 = $1,500 (bonus for the quarter)

The marketing vice president felt that this system would appear too complicated to the sales

force, although he recognized that the bogey derived from capitalizing sales expense seemed less

arbitrary than a quota “plucked out of the air.” The controller felt that the system would be too

complicated to administer, although he realized that the cost of sales would decline as the sales reps

exceeded their bogeys. The sales manager noted that this plan neither emphasized sales by product

line, nor motivated sales reps to open new accounts. But he acknowledged that the system would

encourage sales reps to keep their expenses down, because spending less than budget would lower

their bogeys.

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Exhibit 1

MADISON FIBER CORPORATION

Individual Territory Results and Earnings in 1999

Territory

Number of Actual

and Potential

Accounts 1

Carpet Backing

($ mm)

Yarn

($mm)

Fabric

($mm)

Total

($mm)

Salary

Bonus

Atlanta 42 $32.3 $2.4 $0.0 $34.7 $58,000 $5,200

Baltimore 40 $10.6 $2.3 $0.0 $12.9 $49,000 $4,000

Boston 38 $2.4 $8.5 $0.3 $11.1 $51,000 $4,200

Chicago 48 $7.3 $4.1 $0.8 $12.2 $52,000 $6,000

Cleveland 41 $4.5 $6.8 $0.4 $11.7 $47,000 $5,500

Detroit 50 $3.6 $8.5 $0.5 $12.6 $48,000 $5,000

Houston 44 $11.3 $0.9 $0.3 $12.4 $44,000 $5,700

Los Angeles 45 $6.0 $4.7 $0.6 $11.4 $54,000 $5,500

New York 44 $12.2 $0.4 $0.1 $12.7 $57,000 $4,700

Philadelphia 36 $11.5 $0.4 $0.0 $11.9 $47,000 $4,200

Pittsburgh 42 $4.7 $6.4 $0.3 $11.4 $45,000 $4,200

San Francisco 42 $8.5 $3.7 $0.1 $12.3 $48,000 $5,800

TOTAL 512 $89.70 $38.30 $2.60 $167.3 $750,000 $75,000

______________________ 1 Potential accounts referred to identified prospects that the sales reps intended to call upon or had been called upon.

DardenBusinessPublishing:216471

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