The marketing vice president for Baxter Surgical Supplies Incorporated (BSSI), a manufacturer and distributor of medical supplies and equipment, was reviewing the company's method of compensation at the end of 1998. BSSI was second in the industry in total sales to American Hospital Supplies. The company's main offices were located in Richmond, Virginia, with plants in Florida, Texas, California, and Michigan. The sales force consisted of more than 600 people supervised by 60 sales managers.
BSSI had a variety of products that required different levels of selling skills. Its equipment line consisted of such items as x-ray machines, cast saws, therapeutic equipment, and prosthesis parts. The medical supplies line included all types of medicines, cast material, bandages, splints, and syringes. To sell both lines, the salesperson had to receive good training. These products were sold to hospitals and to physicians with medical practices.
The Role of the Salespeople. The salesperson was expected to search for new accounts, service existing accounts, and maintain goodwill between the company and its clients. A typical day might find the salesperson calling on a hospital in the morning. There, she would check on emergency room needs, the material supplies office, and administrative offices. Afterward, she might set up a display at the hospital, next to the doctor's parking lot. Later, the salesperson might begin making calls on offices located in the immediate area. Usually, a salesperson could make several individual calls because the private offices were generally located near the hospitals. A call might be made to introduce new products to the doctor or it might simply be to check with the nurses about replenishing supplies. If the former was the case, a special time might be scheduled. Major products often required selling on the weekends.
A few products could cost as much as $60,000, whereas other products might not cost more than $1. Generally, the individual accounts placed orders for supplies that would last about two weeks. However, hospital accounts, because of the larger storage rooms, normally ordered monthly. In addition, the hospitals, which had staffs in charge of their inventory, would usually send in their order forms without the help of a salesperson. BSSI policy was to check with these people regularly whether or not they needed any additional help.
Sales Force Compensation. Bill Woodson, a marketing vice president, had the idea of examining the firm's sales force compensation. He believed two areas involving sales personnel needed improvement-sales force turnover and number of sales calls.
Sales managers did some occasional selling, but their primary responsibility was supervision and training of the sales force. Each manager had from 9 to 11 salespeople reporting to him. They were paid a straight salary that depended on their length of time with BSSI. In addition, a bonus was paid to the sales manager at the end of the year depending on how well the district had done. Salaries for all sales managers averaged $90.400 with a range of $79.000 to $117.000.
The sales personnel were paid a straight salary their first year. BSSI management felt that the first-year salesperson knew so little about selling and contributed such a small portion to profits relative to experienced sales personnel that a straight salary would benefit them more. These first-year salespeople were paid $43,000 in 1998. They are typically placed in smaller territories with relatively low sales. As they gained experience, they were paid a larger base salary that depended on the length of time they had been with the company. They also received a bonus at the end of each year according to the district's performance. The bonus equals up to 10 percent of their sales. Sales managers and sales personnel were reimbursed for all expenses incurred while selling. BSSI was proud of the fact that most of its sales force had at least bachelor's degrees, with several members having MBAs.
As Woodson looked over the sales personnel compensation policy, he wondered why his turnover rate was so high. Turnover for people working less than 18 months was 35 percent. After this turnover dropped to 8 percent. It appeared to him that many of the salespeople would get training from BSSI and then run off to competitors. He also felt that because the salespeople were unsupervised so much, they often took off early in the afternoon and possibly did not even work on some days. Woodson understood that there would be several people who would try to take advantage of this freedom. However, he believed that there was just not enough incentive to hunt for those extra sales or spend after-hours time with clients. It appeared to him that the compensation method was benefiting only persons who had been with the firm for some time. He felt there was not enough incentive to keep the really good performers. The aggressive salespersons could earn more in other companies without having to wait. For example, both American Hospital and Stevens Hospital Supply paid 100 percent commission-even for new salespeople.
Woodson considered the three basic compensation plans-straight salary, straight commission, and a combination of salary and incentives. Then he called Bill Jones. BSSI's national sales manager, to discuss the alternatives.
What are the advantages and disadvantages of a straight salary for Baxter Surgical Supplies?