Case study 1: myopic sales force management at an Industrial Mechanics Corporation

A few years ago, the Industrial Mechanics Corporation (IMC), a large firm selling and leasing mechanical equipment to building contractors for use on construction sites, implemented a new compensation plan for its sales force. The objective was to provide its salespeople with a more motivating plan than the current one which was based on salary plus commission on sales volumes. The principles of the new plan were: (1) to reduce the proportion of fixed salary in the total remuneration, (2) to slightly reduce the commission rates on sales, and (3) to compensate for the decreased remuneration level by adding an individual bonus. The salespeople could earn a substantial bonus by meeting an individual annual sales target. Sales quotas were set in such a way as to be higher than the sales volumes realized the previous year in a given territory, but at levels that were deemed both realistic and achievable.

Several months after its implementation, the new plan was considered a success. By the end of the first year, most salespeople had met or exceeded their targets. The average remuneration paid to sales staff had slightly increased. At the same time, company sales and profits had increased substantially – management attributed these positive outcomes to the new compensation structure.

Soon after, however, the situation in the sales department started deteriorating. The morale of the sales force declined, several top salespeople resigned and joined competing firms.