The increase in the sales of the company should also be incorporated in the

McDowell’s Corporation- Designing an Incentive System Case Solution

compensation system keeping the sales volume connected with the costs of the services. So the three key factors that need to be considered by the management of McDowell Corporation when designing the new compensation package would be sales, costs and the quality of the services offered by the first line managers.

Question 2

Assume you are a first-line manager. Outline your views on the 2002 plan and Plans A-D.

Which plan would you prefer that McDowell’s adopt and why?

Assuming the position of a first line manager, if we first of all evaluate the 2002

Compensation plan, then it could be seen that the compensation plan of 2002 is highly complex and most of the first line managers had also expressed their concerns that most of the variables used in the 2002 compensation plan were highly subjective. Moreover, the first line managers also argued that the compensation plan was highly dependent on volume patterns. Measuring the QSC for each store unit was highly complex, subjective and a lengthy process. First Line managers would never feel satisfied under this compensation plan.

Four other compensation plans A-D have also been provided by the management of McDowell Corporation. From the perspective of the first line managers, the first view would be that the compensation plan offering the highest compensation in dollar terms should be adopted by the company. By looking at the computations for the total compensations that have been performed in the excel spreadsheet, Plan B with or without the variation with sliding scale, the first line managers need to recommend Plan B to the management of McDowell Corporation.

PLAN B PLAN B (With Variation)

Base Salary (Range I) 60000 60000
Sales Gain bonus 24000 16800
Profit (Assumed) 66000 66000
Profit Bonus 13200 9900
Total Compensation 97200 86700

This compensation plan is basically a draw against commission compensation plan and focuses entirely on the sales volume growth of the company from year to year. The first line managers would also get a share of about 15% under variation or 12% without variation of the total profits of the company, provided the costs are controlled and gross profit remains at a level of at least 10% of the total sales. Therefore, this would be the most attractive plan for the first line managers. However, from the perspective of the management, this plan would ignore the quality measurement and there would be no relationship between quality and compensation.

Question 3

Assume you are senior officer charged with making recommendations on a compensation plan.

Which plan would you recommend that McDowell’s adopt and why?
Assuming the position of the senior officer in-charge the most recommended compensation plan would be the one which results in accurate measurement of the key factors of the organization’s performance and growth which would be sales, costs and the quality of the services offered by the first line managers.By looking at these factors, the most recommended compensation plan for McDowell Corporation would be Plan A, which is as follows:…………………..

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