Workshop 3

Workshop 3 Case Study

Workshop 3 Shawne Slaughter MGT532: HUMAN RELATIONS AND ORGANIZATIONAL BEHAVIOR INSTRUCTOR: Peter E. Berkeley

February 18, 2009

1

Workshop 3 Case Study

2

Workshop 3 Case Study Calculate the annual income of: a) A beauty consultant who sells $150 (at wholesale value) of products per month; b) A VIP team leader who averages monthly personal sales of $650, with 15 recruits and team sales of $3,200 (Assume she receives a 12% commission on recruit sales; c) A director with 50 active members, who averages monthly personal sales of $500, personal recruits’ sales of $5,000, and total unit sales of $9,500. Assume she recruits three new consultants every third month, which entitles her to a recruiting bonus of $200 per quarter. (Apply 12% commission to recruits sales and an 11% commission to total until sales. Also, add a monthly production bonus of $700.) According to the Case book “a consultant’s income [is] determined by a very clear and objective method, [which is] based on her selling activities” (83). A beauty consultant who sales $150 worth of product at wholesale value would have annual retail sales of $3600. The beauty consultant’s annual income based on $3600 in retail sales would be $1800. A VIP team leader with monthly sales (retail) of $650 would have an annual sales income of $3900 based on total annual retail sales of $7800. Her sales team of 15 recruits would have total annual sales of $38,400. The VIP team leader would receive 12% of the wholesale total of the recruits. This would add an additional $2304 dollars to her annual income based on total team wholesale sales of $19,200. The total annual income for a VIP tam leader would be $6204 as well as the use of a Grand Am. Finally, a director meeting the criteria indicated in the question about would have total personal retail sales based on her own efforts of $6000 per year. This would provide her with $3000 in annual income. She would be entitled to 12% commission based on wholesale of recruit sales of $60,000. This creates additional annual revenue in the amount of $3600.

Workshop 3 Case Study

3

Additionally she would be entitled to 11% on the wholesale value of total unit sales of $114,000. This represents additional income in the amount of $6270. The monthly production bonus and the recruiting bonus would add an additional $8,400 and $800 respectively. The director would have a total annual income of $22,070. Based on these calculations, what component of the financial incentive program appears to be the primary motivator for the sales force?

The determination as to which financial incentive program serves are the primary motivator for the sales force is heavily dependent on the title of the consultant. The primary motivator at the active beauty consultant level is personal selling activities due to the 50% markup associated with the products. One a consultant moves to the level of team leader or director the primary motivator moves from individual selling actives and towards her ability to recruit new consultants. This shift becomes even more dramatic at the director level. Individuals at the director level are not only rewarded with 50% of their direct sales but are line to receive 12% of their recruit sales as well as 11% of total unit sales. Additional revenue streams include production and recruiting bonuses as well as the use of a vehicle. The director in case study question 1 only earned $3000 based on her personal selling activities. The additional revenue steams associated with her recruiting activities increased her personal yearly income 7 fold. Describe a typical VIP Consultant in terms of: •

Demographics

•

Income

•

Management responsibility

According to the Case book a typical VIP Consultant shares many of characteristics associated with the typical beauty consultant including:

Workshop 3 Case Study

4

1. 24 to 54 years old. (p. 88) 2. Married with children. (p. 88) 3. Holds another job. (p. 88) 4. Has some college education. (p. 88) 5. Lives outside a major urban area. (p.88) 6. Spends approximately 8 hours per week on Mar Kay work. (p. 88) 7. Holds $2500 to $3,000 worth of inventory (at suggested retail value) in her home. (p.88) Typical VIP Consultants generate an average annual income of $9200 based on their Mary Kay related selling and recruiting activities. One of the main drivers in Mary Kay’s decision to modify the VIP Car Program is directly related to the management related actions employed by VIP Consultants. As indicated in Case book, the VIP Program drove the number of cars associated with the car programs from 1,100 to 5,000 between 1983 and 1989 (p. 84). It was noted that one of the major costs associated with program related to “car tenure: an increasing proportion of the consultants who had qualified for VIP cars were unable to maintain the required sales and recruiting levels for the 24month period…Mary Kay was forced to reclaim cars that were substantially less than two years old “ (85). This situation created substantial losses for the company. It also indicates that VIP Consultants were so interested in obtaining the level of VIP and therefore earning the use of a vehicle that they became focused on quantity and forgot about quality. As a result many of the individuals they recruited into Mary Kay were unable to maintain their numbers. This meant that the VIP Consultant could not maintain the two management requirements associated with the

Workshop 3 Case Study

5

position; maintaining team production of $36,000 per year and personal production of $7,200 per year. Recommend a set of changes to the VIP car program that will improve overall sales force effectiveness at Mary Kay. Consider the motivational risks and cost effectiveness of your proposals as well as how they will be implemented. Be as specific as possible. The current VIP program utilized by Mary Kay has the potential of increasing overall company operating costs due to the short-sale situations which arise when a VIP Consultant is unable to maintain her numbers and therefore forfeits the use of a company supplied vehicle. Attempts to design a more effective program would be more specific if the case study provided details associated with the cost of the vehicles along with the amortization scheduled utilized by Mary Kay. The following recommendations are made in the absence of this critical information. VIP Consultants currently earn the use of a Pontiac Grand Am if they are able to maintain team production of $3000 per month and personal production of $600 per month. It is also required that the production team consists of at least 12 recruits and further that 10 of these recruits be in an active status “by the end of the four-month qualification period” (94)”. As indicated in the Case book, VIP consultants “feel no motivation to increase their sales and recruiting efforts above the level necessary to maintain the use of their cars… [Mary Kay] is not tapping their full potential because [the company is] not rewarding them for achieving it” (p. 7). It would appear that the VIP Consultant is treading water or just maintaining the threshold necessary to maintain use of the vehicle. Any attempt to modify the VIP car program should be implemented with a ‘grandfather’ clause. Consultants who are able to maintain the current requirements associated with the VIP car program should be exempt from any new requirements. The new guidelines should apply to

Workshop 3 Case Study

6

those consultants who forfeit the use of a Grand Am because they are unable to maintain the minimum requirements of the program as well as consultants who hit the milestone after the new guidelines have been implemented. Recommended modifications to the program include: •

Consultants must maintain a team consisting of at least 10 consultants of which 8 must be in an active status. The reward level associated with a company provided Grand Am will not be triggered until this status is maintained for at least six months. This will motivate the consultant striving to achieve VIP status into considering the quality of the consultants that she recruits.

•

A consultant is considered to be in active status during the month of and two months after she places wholesale orders totaling $225 or more. This represents an increase of 12.5% over the existing definition. This guideline should be applied to all consultants regardless of tenure as a way of generating an additional revenue stream to offset some of the costs associated with the VIP car program.

•

All consultants at the team leader level will receive a longevity bonus of an additional 1.5% of the wholesale sales of any of the recruits on her team who are able to maintain an active status for more than 3 quarters. This will provide team leaders with an additional financial incentive for facilitating the selling and recruiting abilities of her team members.

Workshop 3 Case Study

References Case book, Prentice Hall Robbins, Stephen P. (2005). Essentials of organizational behavior (8th ed.). Upper Saddle River, NJ: Prentice Hall.

 

7