Zargo Company

In this case, the company’s goals are to achieve higher profits and return on investment. The company compensation plan should motivate the sales force to accomplish the above stated goals.

The commission is 20 percent of standard gross margin on a full absorption basis. Standard gross margin is defined as actual sales multiplied by standard cost of goods sold and full absorption basis means fixed overhead cost is allocated to each unit standard cost. Additionally, a year-end bonus of 10 percent of commissions earned is paid to salespersons that equal or exceed their annual sales target.

Advantages

What counts, gets measured. Since high profits, instead of high revenues, are what counts in this case, the sales commission is calculated based on gross margin instead of revenues. And what gets measured gets done. When using gross margin as the base to calculate commissions, salesmen have the motivation to either sell more of products with high gross margin or try to increase the volume sold of products with lower gross margin, hence they will create a best “product-mix” without the instructions or guidance of the supervisors. Since salesmen have the motive to sell as many products as possible to whoever they can approach, the customers’ credit is approved by the company credit department to avoid the situations where the accounts receivables cannot be collected and become bad debt for the company. Price concessions are granted on occasions by top sales management instead of salesmen, since this is more likely to be a strategic decision. If it can be made by the salesmen, they are motivated to give big discount for no reason to increase their volume more significantly, so the end results will still be higher margin, but it is disadvantageous for the company since the true value of the products are actually higher than the price offered. The occasions that management may give discount is for example they want to get attention of new customers or repeat sales to...