Houston Fearless Case

For the company's sales incentive system, Houston Fearless 76, Inc needs to achieve revenue growth and consistent profitability as their main objectives.in addition, the company needs to improve performance and develop new profitable market. In this essay, The old incentive plan-- when they make huge overtime labor costs whereas the operation department lost orders since they do not meet the delivery schedule.Pros:the commission is paid based on sales revenue, which is straightforward and easy to understand and compute. This keeps original market shares and sales volume.Cons: firstly, the plan does not motivate salesperson to develop new markets since the commission is only based on financial measure (sales dollars) rather than on revenue growth. The plan does not meet to gain more shares. Secondly, Sales revenue is measured as proceeds from items shipped within each salesperson's assigned area. Hence, the connection between efforts and rewards is ambiguous. In addition, the existing incentive plan lacks an effective reward plan and accuracy of forecast because it does not consider other factors such as salesperson behavior, the profit margin and other potential strategic goals. For example, the telephone orders, economic conditions could be a factor as part of the salesperson commission. The new incentive plan--The companies improve the margin. Salesperson commission is based on gross profit margin, which motivates them to focus their efforts in order to grow business profitability. Furthermore, the new plan improves accuracy of their forecast. This may enhance the business operation. Bonus paid to achieve MBO targets is adopted in the new plan to improve communication and networking. The evaluation of MBO intends to favor employees. Extra base salary of 5% is calculated in salesperson performance. However, the new plan brings new issues. To start with, the minimum performance standard has been established, which indicates that no commission will be paid until gross margins exceed the cap 70% of the forecast. This figure is totally unfair to sales representatives who may merely concern low gross margin products while salespersons tend to set low forecast target and it is usually hard for them to achieve high gross margin at the early stage. Secondly, the accuracy of estimate for extra bonus of 5% could be troublesome since it only relies on salary compensated rather than the commission. Afterwards, the cost of implementing this plan could be huge. As long as the sales staffs meet the 70% requirements of standard, the commission could be a high cost to the company. Recommendation--The new plan shows its percentage-oriented nature. Gross margin equals gross profit divided by sales. Nonetheless, it neglects period costs such as selling and administrative expenses. My suggestion is: If they sell products with high gross margin, they will incur extremely high period costs which the gross profit cannot cover. The company cannot afford the