Abstract
The case is about restructuring of the sales force compensation system at Service Sales Corporation (SSC), a large shoe retailer in Pakistan. The organization went through many changes in its supply chain management starting in 2001, when a new COO, Omer Saeed, took over. There was a major increase in sales and the number of shops, and a decrease in the number of salesmen per shop with the net effect that some salesmen were drawing a compensation of ₹25,000–30,000 per month (standard salesmen salary in smaller shops was ₹8,000 per month). When the new COO Amer Mohsin joined in 2009, he was faced with the challenge of designing a salesmen compensation system that was in line with the growth of the organization. The case provides an opportunity to understand how different compensation systems are required as company dynamics change.
Keywords
Discussion Questions
What are the main issues with the current incentive plan? And what are the main causes?
Given the nature of the job of a salesman at SSC, is fixed salary, or performance based variable compensation better suited?
As Amer Mohsin, what would you do about the SFR proposal and why? Are there other alternatives possible? If yes, what are their pros and cons?
In early 2009, Amer Mohsin, the recently appointed Chief Operating Officer (COO) of Service Sales Corporation, and his senior management team reviewed the company’s 2008 financial results. They were happy to notice that the changes they had made to the company’s supply chain and merchandising were bearing fruits. Annual revenues were ₹5.8 billion, and the compound annual growth rate met the target level of 24 per cent. However, higher sales had increased the cost of salesmen as well, with reports of some salesmen making as much as ₹30,000 per month. Some senior managers had proposed a new Sales Force Rationalization compensation plan, and Aamer Mohsin wondered if the sales force incentive plan needed a change too.
Service Group and SIL
The Group was initiated during the Second World War in Lahore, Pakistan, as a partnership between three college friends, Mr Nazar Mohammad, Mr Mohammad Hussain and Mr CMS Khan, to manufacture and sell cotton textile (canvas) travel packs to the British army in India. Within a few years, they diversified their business and began manufacturing leather sandals for the Indian police. After the partition of India in 1947, the firm lost a major part of its market. Production of travel packs was discontinued, but the firm was able to recover financially through a contract for the supply of military shoes to the Pakistani army. The partnership was changed to a registered firm Service Pakistan (Regd), employing 15 full-time production workers.
Service Industries Limited (SIL), a private limited company, was established in 1953. In 1954, the company installed a shoe-manufacturing plant in the industrial area of Gulberg, Lahore. The 1950s was an era of rapid expansion for Service. Based on the learning and experience in shoe manufacturing, a standard design of children’s black school shoes was developed to be sold through its own retail outlets. The firm had started acquiring retail outlets in Lahore, and the retail outlet location strategy was simply ‘locate a Servis next to every Bata outlet’. Initially, the outlets carried various brands of shoes but as the Service product line expanded, they exclusively stocked Servis brand name products. Gradually, the network of retail outlets was extended all over the country (Exhibit 1).
From the 1950s to the 1970s, Service increasingly invested in new equipment and machinery and expanded its product line to include canvas and leather shoes with leather, rubber and PVC soles. By 1958, as the product quality improved, the company started exporting canvas shoes to buyers in the United Kingdom. Within a decade, it ventured into the export of canvas shoes to Germany and gained a favourable reputation in the German market. The export products were manufactured under the buyers’ brand names and were mostly carried by discount stores in foreign markets. In 1964, the management shifted the factory from Lahore to Gujrat. To finance its rapid growth in the international and domestic markets, Service was converted into a public limited company in 1969 under the name Service Industries Public Ltd.
In 1956, Service set up ‘Hilal Tanneries Ltd’ to ensure a consistent supply of quality finished cow and buffalo leathers for shoe uppers. Finished buffalo leather was also supplied for leather accessories. Service diversified into textiles in 1962 by setting up Service Industries Textiles Limited (SITL). SITL started production in 1965 with 12,400 spindles and 200 looms. The capacity was doubled in 1969 with the addition of another plant. In 1981, after 45 years of partnership, the directors of Service Group decided to separate amicably, with Mr CMS Khan and his sons taking control of SITL, and Mr Nazar Mohammed and Mr Muhammed Hussain keeping the other businesses.
In the 1970s, SIL created a line of sports shoes including soccer, golf and tennis shoes for the export market. A variety of models designed for export were also introduced in the local market. By 1981, the company was involved in managing shoe factories in Tanzania which produced shoes with Polyurethane (PU) soles.
In 2008, SIL had shoes, tyres, tubes and rubber production facilities in Gujrat and Muridke. Net sales were ₹6.4 billion, an increase of 41 per cent from 2007 (Tyres and tube sales, both export and local, were above ₹2.6 billion).
Service Sales Corporation
Service Sales Corporation (Pvt.) Ltd (SSC)—the Group’s marketing and retail company—was established in July 1963. The CEO of SSC reported to the CEO of SIL. This resulted in sub-optimal decisions for SSC at times. For example, if a certain style had a major surge in demand in the export market, the SSC’s supplies for that style would be negatively affected. Also, at times the SSC had to order at large volumes only to keep the production in SIL at capacity. In the 1990s, SIL and SSC became totally independent entities, only answerable to the family board. SSC complemented SIL products, wherever necessary, by shoes bought from other local manufactures. These purchased goods, which made up 20 per cent of sales in the 1990s, were also sold under the brand name of ‘Servis’.
Wholesale Operations
‘Servis’ footwear was sold via two main channels. In the 1990s, about 40 per cent of the total sales took place through the wholesale channel and 60 per cent through company owned retail stores. The wholesale operation was conducted through small, privately owned shoe stores that sold shoes from a wide array of shoe manufactures. These outlets were supplied with company manufactured products from Servis wholesale depots. Each depot served a different wholesale region. The intention was to utilize the privately-owned shoe stores in areas where it might not be cost-effective to open a company owned store. However, with the expansion of the retail operation, the company owned retail stores were sometimes situated in close proximity to one of the outlets for the wholesale operation.
Retail Operations
Retail Stores
In the 1990s, the company’s retail distribution operation was divided into 12 geographical regions, called Sales Districts (the number of districts was increased to 18 in 2001). Individual districts contained between 10 and 20 retail stores. SSC retail stores were classified based on size and sales revenue of the store. The ‘Store Types’ (ST) ranged from ST-06, one salesperson and 2 million rupees sales, to ST-15, 12 salespersons and 65 million rupee sales (Exhibit 2). Inventory allocated to a store was one-fourth of the annual sales. ST-10 and above were considered high revenue stores, while those coming under a lower classification were considered low income stores.
Sales Force Incentives at Service Sales Corporation
Stores were also classified as ‘A Pair’ stores, ‘B Pair’ stores, Factory Outlets (FOL) and Franchisees. A-pair stores were also called Service Family Stores, and housed a variety of shoes for the whole family. B-pair stores were also called Best Value Stores (BVS) and carried slightly lower priced varieties. Service Factory Outlets were the most value-oriented stores of the SSC retail format. The Service Factory Outlet offered promotional deals on ladies, men, children and sport shoes that carried the ‘Servis’ label. New deals and promotions were a regular feature. Sales were also made through franchisee owned stores, which carried the same variety as A-pair stores and had one or more SSC salespersons.
The stores displayed various artefacts and banners displaying messages from the SSC. The furniture present at the stores was of high quality. The stock rooms were usually on the upper floor of the store. Sometimes stocks were kept as high as the third floor. There were no elevators, so the salesmen had to run up and down to fetch the shoes. The stores did not have electronic databases to keep track of shoes nor did they have a perpetual inventory system to track inventory. The salesmen were therefore required to know which categories were present in the store. They also needed to have information regarding stocking of shoes and the inventory levels in the store.
Retail Organization
Store managers were responsible for operating their respective stores. They directly dealt with salesmen and noted the performances of the salesmen daily. The larger stores were typically headed by managers who had spent several years at the SSC, while the newer recruits were normally assigned the management of the smaller stores. Several managers had only limited formal education, though lately Service had made a bachelor’s degree the minimum qualification for employment as a store manager. Each store manager reported to a district manager (DM).
The DMs were fully responsible for the management of respective district operations, for example, sales management, stock management and sales force management in an efficient and cost-effective manner. They would go to the stores and check if the assortments were right and the stores in their district were performing up to the mark. The DMs would frequently visit stores in the district to ensure compliance of company policies at the store level.
Forecasting
The SSC management relied on a bottom-up information flow for their forecasting needs. The DMs consolidated data provided (twice a month) by store managers for their inventory needs after 2 months. These data were analyzed by the wholesale and retail marketing directors for product or regional trends. In addition, they called meetings with the DMs to discuss any details that may not have been captured in the sales data. The DMs estimates were based almost entirely on the previous year’s sales data.
Salesmen at SSC
An entry-level salesman would be a young man in his early twenties. The basic qualification of a salesman was matriculation. 1 Most of the entry-level salesmen would have no prior experience. They would be coming from low-income backgrounds. They could speak Urdu (the national tongue) and few words of English.
According to Tausif Hassan, Operations Head Retail North:
The responsibility of the salesmen is to convert the potential customer that entered the store into sales. They are supposed to create a pleasant buying environment for the customers. They should educate the customers regarding SSC products and their benefits, help them select the right pair of shoes that would meet customers’ requirements and make their shopping experience at SSC memorable. They are also required to have knowledge about the existing categories, new categories being developed at SSC, and the placement and availability of shoes in the store. If the store runs out of stock the salesmen is also expected to guide the customers to the nearest store that would have the stock or at least be able to tell the customers when the new stock would be available.
Salesmen Compensation System
Since the incorporation of the SSC, the salespeople fell into four categories. Salesmen entered the SSC as ‘Trainee Salesmen’. Trainee salesmen in small cities would get a lump sum amount of ₹6,000 2 per month, while those in big cities like Karachi, Lahore and Islamabad/Rawalpindi would get ₹7,000 per month. The trainees thus only had a fixed portion and no variable portion in their salary. Junior salesmen earned a fixed salary, 2.5 per cent commission and house rent equal to 10 per cent of basic plus commission (Exhibit 3). Senior salesmen-II had slightly higher fixed salaries but the same percentage for commission. Senior salesmen-I had even higher fixed salary than senior salesmen-II. They also received 3.5 per cent commission on personal sales.
The salary of salespeople was calculated using the Equal Distribution Method (EDM). In the EDM, revenue generated per store was divided by the number of salesmen to calculate salesmen commission, considering equal contribution of each salesperson at the store in generating sales. For most salespeople, commissions amounted to 90 per cent of their compensation.
Salesmen Career Progression
The SSC inducted new salesmen as ‘Trainee Salesmen’. The trainees remained in this position for 6 months to 1 year. The next position in the hierarchy was of a junior salesman. All junior salesmen started their job from lower STs (usually from ST-6). The promotion of a salesman to the next level was done after getting grade promotion test clearance. If the DM observed that a person at a store in his district was performing well, he would file a case for his promotion. Hence, there was no specific time frame for promotion.
Sales Force Incentives at Service Sales Corporation
The promotions were of two types. In the first case, the designation of the salesmen would change. So a junior salesman may be promoted to senior salesman 1. Promotion also occurred when salesmen got transferred to the next level store. Salesmen generally considered transfer from a lower ST store to a higher ST store as real promotion (salesmen were generally not very interested in the promotion from a junior level to senior level). Salesmen with 10 to 15 years of experience would reach ST-15. According to the General Manager HR, Ali Nagi:
The salesmen want to move to larger stores. That is when the real promotion takes place. They crave for bigger stores that generate more traffic and hence larger revenues. Since 90% of their salary is linked to sales, larger stores are where they get the real pay raise. The ultimate goal of a salesman is then to reach ST-15 stores that generate the maximum revenue.
Changes in Supply Chain Management
In 2001, Omer Saeed took over as the COO. Omer had an MBA from Harvard University. In Omer’s words:
The company needed a cultural change. The average age of managers was 53 years. Employees were generally concerned just about their bit of the job, and not worried about the success of the organization. Double-digit growth seemed a big challenge and company profits were hovering at 2% of sales for several years.
The SSC had twelve brands and 1,200 employees in 2002. Omar started off by inducting relatively younger but competent managers at senior levels. The age of newly inducted managers ranged from 30 to 35 years.
Then, along with his new team, Omar attended an executive course in supply chain at the Lahore University of Management Sciences (LUMS) in Lahore. He later on embarked on several supply chain improvement initiatives based on his team’s learning from the course. A project with the name of Project Giant Leap was started to revamp the supply chain process of the SSC by spending a total of ₹51 million. The main pillars of this project were as follows:
Implementation of the Merchandise Planning System: Category management/merchandising function was strengthened. Individuals were given responsibilities for different product ranges/brands. Availability of merchandise in major price categories was ensured. Implementation of the Supply Chain Information System. Assortment Rationalization Process (to reduce non-saleable SKUs): This included reducing the number of brands to six. Each brand would target a specific market. Overall assortment should cover different customer needs as well as price ranges. Implementation of the EPOS (electronic point-of-sales): This would enable them to get prompt sales data from shops.
By 2005, the company had crossed its major competitor Bata 3 in sales revenues (Exhibit 4). The Employees received healthy bonuses, which was due to higher top line and bottom line.
Changes Made from 2005–2009
In 2005, the SSC’s top management targeted opening 80–100 stores in a year. Following were some of the initiatives that the SSC took to attain this growth:
Before 2005, the company used to source 80 per cent of its products from SIL Gujrat and Mureedke and 20 per cent was local purchase. By 2008, this changed to sourcing 40 per cent of its products from the local market, 10–15 per cent from the foreign market, and the rest from SIL. Previously, men’s shoe collection comprised of 70 per cent old and 30 per cent new items. This practice was changed to keep 55 per cent new items on stock. The company started to host an annual conference in 2008 to recognize the performance of high achievers. Awards were introduced for the best performing store for the quarter and for the best performing salesman of the quarter. The best salesman award was given to the salesman who achieved highest sales for the quarter under consideration. The award was in the form of cash and performance certificate. The retail wholesale business was reconfigured to increase its volume to 60 per cent of overall business. Kurt Salmon Associates, a consulting company specializing in retail and consumer products’, was brought in as a consultant in 2007–2008. They advised the company to do in-season planning in addition to off-season planning. This meant that the company had to plan before the start of the season,
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for example Eid, as well as during the season. Excel-based management tools were introduced. A Retail Management System, developed in-house, was launched. It was a resource planning software that helped the SSC in its planning process. A range of similar products were broken down into discrete groups known as categories (e.g., men’s footwear category which included men’s shoes). Each category would now be managed by a category manager and have its own profit and loss accountability. A position of Chief Merchant was created to manage all the categories maintained by the SSC (Exhibit 5). It opened a Central Distribution Centre (CDC) for better management of the inventory in 2008. Previously, products were supplied to all shops directly from the respective sources, due to which saleable items would often reach sale points late. The CDC helped the SSC in managing their inventory and supplies centrally to further distribution across the country. New store formats were opened. Shoe Planet (Private) Limited, launched in 2006, was Pakistan’s first multi-brand, mega-shoe retail chain. Shoe Planet’s spacious stores housed renowned footwear brands catering to varying customer needs. With partner brands like Nike, ECCO, CAT, Hush Puppies, Clarks, Urban Sole, Don Carlos and Cheetah, Shoe Planet offered a range of footwear brands. Soul Collections opened in 2007. Soul Collections represented Pakistan’s ladies fashion footwear and aimed to provide a one stop shopping experience for women. Service Megastore opened in 2008. Service Megastores showcased the latest collections of both local and international shoe brands. Service Megastores were large stores designed as lifestyle stores that reflected the demands and trends of modern living.
Improvements in Sales Force Management
In the year 2008, the SSC introduced the SAPAMEC programme (Exhibit 6) to allow evaluation of salesmen on their customer dealing and to improve customer service at the SSC stores. Previously, salesmen were evaluated only based on the sales they made and not on their customer dealings. According to Tausif Hassan:
The aim of this program was to create a consistent environment of customer care in the stores that would exceed customers’ expectations and make their shopping experience memorable. Customers who pay a visit to our Store expect an outstanding experience. The Store must be clean and well maintained, service should be fast and friendly and order should be accurate and well presented. Our SAPAMEC standards for customer service ensure that the Store team must know how to create and deliver a WOW shopping experience to our customers because customers now expect more than ever before. They expect more quality, more features, more benefits, more variety, more flexibility, more value and now they want… MORE SERVICE!
The SSC also started a training centre, Retail University, for the salesmen working at Service. There were twelve excellence centres where salesmen were formally trained two to three times in a year. The university provided training in different aspects of customer service, which included modules from greeting people and capturing their attention to making a sale. The objective of these trainings was to make salespeople well versed in selling the products of Service Sales Corporation. Through these trainings, the salesmen not only gained insight on persuasive selling skills and customer service but also received knowledge of Service products and their benefits.
Sales Force Incentives at Service Sales Corporation
Sales Force Incentives at Service Sales Corporation
Issues in 2009
By 2009, the SSC retail operations were opening a store every week. Dealer network was expanding by 100 dealers every year. Franchising channels were being established, and the SSC was growing at an average rate of 24 per cent. As a result of expansion activities, the SSC in 2009 was operating 430 (eighteen districts with nearly twenty-five stores in each district) retail outlets in Pakistan out of which 100 were franchise operated. The company also had 2,000 dealers. A total of 2,500 people were employed at the SSC out of which 576 were based at the head office. There was one manager for each retail outlet. There was also at least one employee at each of the franchises who had prior experience as salesperson in the SSC.
Management of growth was also a challenge. The company had decided to open larger stores (ST-10 and above). New stores were staffed by salesmen transferred from older stores as well as trainees hired to feed into the growing requirements for the sales force. The vacant slots for salesmen in older stores were also filled up with newly hired trainees. Consequently, the SSC had around 900 salesmen and 300 trainees in 2009.
In 2009, the average salary of a salesman at a large store had reached the range of ₹18,000–30,000 as compared to ₹8,000 market rate for the same job. This high return was partially due to incentives being equally divided among a lesser number of salesmen in stores, as well as high growth in sales. Ali Nagi noted:
This system is excellent if the company is growing by 10–15%. As for us, we are growing at 25% annually. This growth brings in lot of business because of corporate efforts and the salesmen still get a chunk of this, as 90% of their salary is linked to sales. The high commission also resulted in other problems. We are now witnessing a ‘decrease’ in motivation, as the shop location and number of salesmen were the major determinants of what a salesperson made. Salesmen take time off at will, and help ‘cover’ for each other, as there is no way of tracking who made how many sales. Also our system has resulted in ST-15 stores being staffed with salespeople aged 40 and above. Why can’t young and energetic people get transferred to larger stores if they are really good? We need high energy salespeople in the ST-15 stores too. In fact, given the size of these stores, one can argue that we need younger people in these stores to make the frequent (longer) trips to the stockroom. Last, but not the least, we have heard complaints that salesmen are making trainees leave in the first three months, to ensure that they are not promoted to a junior salesman position and hence get a share in the commissions.
The Sales Force Rationalization Proposal
Consequently, some senior managers proposed a new Sales Force Rationalization (SFR) compensation plan. Under the plan all existing trainee salesmen would be called ‘star’ salesmen. All new salespeople would also be inducted under the new plan. Star salesmen will be compensated at a much higher fixed salary (Exhibit 7), but make only 0.5 per cent of the sales as commission (hence, star salesmen’s compensation would have only a 10 per cent variable component on average). Star salesmen would also not get any house rent. The salary structure of senior salesmen would remain as in the old system (senior salesman 2 and senior salesman 1). Last, new salesmen could be inducted into a store of any size.
Amer knew that Bata was also in the process of making improvements to its supply chain, to make up for the impact on its business created by the SSC’s recent growth. The SSC was also facing competition from smaller, but rapidly growing footwear retail chains like UrbanSole, which had become an established name in men’s shoes in Pakistan. As Amer reviewed the SFR proposal, he also looked at information he had on UrbanSole and Bata’s sales force incentive plans (Exhibits 8 and 9). He knew that whatever changes he made to the decades old compensation system, would have a major impact on the SSC at all levels as well as on its financial and operational performance for many years to come.
Sales Force Incentives at Service Sales Corporation
Sales Force Incentives for Bata
Bata had a compensation system similar to SSC. Bata also used equal distribution method to compensate its salesmen. The sales force structure was also similar. However, there were some key differences. For instance, Bata had three levels for salesmen as compared to two for SSC. The fixed salaries and percentages offered were different. Bata ensured that salesmen take a minimum salary home, while SSC did not have any lower limit on salesmen salaries as the major portion of their salaries was dependent on sales. Bata also offered achievement bonuses to its employees. Salesmen achieving target sales (100 per cent) received 0.05 per cent of the achievement value. The percentage increased by 0.05 per cent for every 5 per cent increase against target. So those achieving 105 per cent against target received 1 per cent of achieved value and so forth.
Sales Force Incentives at Service Sales Corporation
Furthermore, there were differences in operations. Bata categorized its shops into two categories. City stores were stores located in urban areas, while family stores were located in rural areas. The shop manager was responsible for setting the stores’ operation policy. He could run the stores on stock turn basis (usually city stores were run this way) or he could run the stores on volume basis (generally family stores were run this way). The staff mix was also different. Bata had a blend of 60 per cent senior (those taking 3.0–3.5 per cent commission) and 40 per cent junior staff (with 2 per cent commission) at their stores. Specialized salesmen were assigned at city stores for every brand. These people had good knowledge of their category stocks and sales. In addition, Bata had electronic point of sale (EPOS) system to track sales of individual salesmen. These data were used to monitor sales performance and helped in promotions and transfers. (However, neither Servis nor Bata had an electronic system to track stock and inventory level. In some shoe stores in Europe and the US, salesmen had a gadget in their hand that helped them track stocks and their levels in inventory. Whenever a customer asked for a category of shoes they could very quickly check the stock level and its position in the store.)