Case Study: Principles of Management

Business/Management

Frances Patterson, Kimbel's CEO, looked at the latest Sales by Manager figures on her daily Web-based sales report. What did these up-to-the-minute numbers tell her about the results of Kimbel's trial of straight commission pay for its salespeople?

A regional chain of upscale department stores based in St. Louis, Kimbel's faces the challenge shared by most department stores these days: how to stop losing share of overall retail sales to discount store chains. A key component of the strategy the company formulated to counter this long-term trend is the revival of great customer service on the floor, once a hallmark of upscale stores. Frances knows Kimbel's has its work cut out for it. When she dropped in on several stores incognito a few years ago, she was dismayed to discover that finding a salesperson actively engaged with a customer was rare. In fact, finding a salesperson when a customer wanted to pay for an item was often difficult.
About a year and a half ago, the CEO read about a quiet revolution sweeping department store retailing. At stores such as Bloomingdale's and Bergdorf Goodman, managers put all salespeople on straight commission. Frances decided to give the system a yearlong try in two area stores.
Such a plan, she reasoned, would be good for Kimbel's if it lived up to its promise of attracting better salespeople, improving their motivation, and making them more customer-oriented. It could also potentially be good for employees. Salespeople in departments such as electronics, appliances, and jewelry, where expertise and highly personalized services paid off, had long worked solely on commission. But the majority of employees earned an hourly wage plus a meager 0.5 percent commission on total sales. Under the new scheme, all employees would earn a 7 percent commission on sales. When she compared the two systems, she saw that a new salesclerk in women's wear would earn $35,000 on $500,000 in sales, as opposed to only $18,000 under the old scheme.
Now, with the trial period about to end, Frances notes that while overall sales in the two stores have increased modestly, so also has employee turnover. When the CEO examined the sales-by-manager figures, it was obvious that some associates had thrived and others had not. Most fell somewhere in the middle.
For example, Juan Santore is enthusiastic about the change, and for good reason. He works in women's designer shoes and handbags, where a single item can cost upwards of $1,000. Motivated largely by the desire to make lots of money, he's a personable, outgoing individual with an entrepreneurial streak. Ever since the straight commission plan took effect, he has put even more time and effort into cultivating relationships with wealthy customers, and it shows. His pay has increased an average of $150 per week.
It's a different story in the lingerie department, where even luxury items have more modest price tags. The lingerie department head, Gladys Weinholtz, said salespeople in her department are demoralized. Several valued employees had quit, and most miss the security of a salary. No matter how hard they work, they cannot match their previous earnings. "Yes, they're paying more attention to customers," conceded Gladys,"but they're so anxious about making ends meet, they tend to pounce on the poor women who wander into the department." Furthermore, lingerie sales associates are giving short shrift to duties such as handling complaints or returns that don't immediately translate into sales."And boy, do they ever resent the sales superstars in the other departments," said Gladys.
The year is nearly up. It's time to decide. Should Frances declare the straight commission experiment a success on the whole and roll it out across the chain over the next six months?

QUESTIONS:
1. What theories about motivation underlie the switch from salary to commission pay?
2. What needs are met under the commission system? Are they the same needs in the shoes and handbag department as they are in lingerie? Explain.
3. If you were Frances Patterson, would you go back to the previous compensation system, implement the straight commission plan in all Kimbel's stores, or devise and test some other compensation method? If you decided to test another system, what would it look like?