Tarrell Company compensates its field sales force on a commission and year-end bonus basis. The commission is 20 percent of standard gross margin (planned selling price less standard cost of goods sold on a full absorption basis) contingent on collection of the account. Customers' credit is approved by the company's credit department. Price concessions are granted on occasion by top sales management, but sales commissions are not reduced by the discount. A year-end bonus of 15 percent of commissions earned is paid to salespersons who equal or exceed their annual sales target. The annual sales target is usually established by applying approximately a 5 percent increase to the prior year's sales.
Required:
a. What features of this compensation plan would seem to be effective in motivating the sales force to accomplish company goals of higher profits and return on investment? Explain why.
b. What features of this compensation plan would seem to be countereffective in motivating the sales force to accomplish the company goals of higher profits and return on investment? Explain why.