CASE STUDY
Rafael Russo established Rafael's Bike World, a retailer of bicycles and related parts and gear, in 2010 in Milan, Italy. The company saw steady growth in its first few years and had opened eight stores throughout Italy by the beginning of 2017. Each store has one manager and four to six salespeople, with two to three working on the sales floor at any given time.
Rafael has always prided himself on having a top-notch sales staff. Although the staff shares a common bond of love for cycling, they are a heterogeneous group in other ways. About one-half are in their 20s, one-quarter in their 30s, and one-quarter in their 40s. Some have families, some do not. Some are married, some are single. Some rely solely on the job income to live, some do not.
For the first four years, Rafael paid his staff a straight salary in the range of $25,000 to $40,000, depending on sales experience, with an annual bonus of $1,000 if the salesperson met the standard sales quota for the year. Rafael liked the stability the salary provided his staff, especially those with families. However, sales began to drop with the onset of a recession in 2014. Rafael decided that the staff would sell more if they were better motivated. So he instituted a new compensation plan that paid the sales staff on 100 percent commission. To allow for some stability, there was a system of a "draw" where employees could borrow against future commissions.
This plan has now been in place for almost three years, but sales are still declining. Rafael recently sat down with his best store manager to assess the commission-based compensation plan. They started with Rafael's business goals in order of importance: (1) increase sales revenues relative to quota, (2) increase customer satisfaction and customer loyalty, (3) increase sales for certain product lines, (4) take advantage of bike knowledge of the sales staff, and (5) encourage bicycle riding in local events.
Then they examined the staff. Luca's first observation was that the sales skills of his staff vary greatly. For example, top performer Leonora Rossi has no trouble meeting her monthly numbers. However, other salespeople do not sell as easily and feel pressure because they support big families. Moreover, several have taken money from the draw but then felt even more pressure for being far behind. Several have even quit to eliminate their debt, leaving Rafael with a loss and having to incur the added expense of training new hires.
In addition, the sales approach has evolved into one of pressuring the customer to buy rather than building a relationship and taking the true needs of the customer into account. Also, there has been little effort to follow up with customers after a sale or assist with bike maintenance. As a result, customer loyalty and retention have been down. Furthermore, the old team environment, where a salesperson with a customer would call over a more knowledgeable salesperson to answer a customer question, has been replaced with an "every person for her- or himself" mentality.
Rafael and Luca decided that things must change, and the compensation plan was the place to start.
Provide two advantages and two disadvantages of Rafael's straight salary compensation plan. Provide two advantages and two disadvantages of his straight commission plan?
Given the preceding facts, recommend to Rafael a compensation plan that would best suit his situation. What other compensation devices might you use in addition to bonus, salary, and commission? Explain your recommendation.