W4 '74 ég’ ( C ." ”.r . ‘- ABSTRACT COMPENSATION OF SALESMEN IN THE METALS SERVICE CENTER INDUSTRY AS A FACTOR IN THE PROFITABILITY OF THE FIRM by Leonard Dalton Orr This study was designed to accomplish three basic objectives: to identify and classify current salesman compensation practices in this industry; to study the relationship of differences in these practices with distinguishable characteristics of the service centers, e.g., size of operation; and to assess the congruence of salesman compensation practices with management's strategic and tactical plans for profitable operation of the firm. Usable questionnaires were returned by sixty of a selected sample of sixty-six member companies of the Steel Service Center Institute. In addition, personal inter- views, using the questionnaire as the basic interview for- mat, were held with executives of fifty-five of the sixty- six companies in the sample. It-was found that approximately one-half of the respondent companies had made at least one major change in their outside salesmen compensation plans during the six year period just prior to the study (1960-1965 inclusive), and slightly more than one in five had made two major Leonard Dalton Orr changes in that period. Two-thirds of the respondents reporting major changes were adding a profitability factor to their plans, or increasing the importance of a profit- ability factor already present in their plans. Only a small minority of the respondents reported the regular use of non-money (psychological) rewards in their salesman compensation programs. The plans reported by the large majority were strongly money-oriented. The components of money compensation were studied separately. Selected fringe benefits were found to be widely offered as part of the compensation package through- out the industry. Although individual company practices with regard to reimbursement of expenses normally incurred by salesmen in this industry (automobile travel and customer entertainment expenses) varied somewhat in details, in general these practices were characterized by the uniformity of the end result in terms of reimbursement. Typically, much of the responsibility for deciding whether or not to make a customer entertainment expenditure was left to the salesman, with only ex post facto manage- ment review control.l Only about one in four respondents reported the use of budgetary control of these expenses and less than one-third of these tied the budgetary control to either the sales volume or profit volume level of the territory. Leonard Dalton Orr Although only about one respondent in ten reported the use of straight salary plans for these salesmen, fixed compensation (salary) was a major component in most re- ported plans. Salary-bonus plans typically were 80% salary; salary-commission plans typically 50%-60% salary. The pool bonus was the predominant type of bonus used and, although frequently the pool amount was based on a general profit-sharing formula, the individual bonus share was allocated on the basis of employment factors (salary and years of service), or by management fiat, or both in the great majority of plans. Commission incentive, where a profitability factor was used, was based on an ob- jective measure of product, product-line, or territorial profitability--usually a gross profit measure. An outside salesmen compensation plan custom-designed to accomplish clearly defined marketing objectives which were based on clearly defined corporate objectives was found to be the exception rather than the rule in this industry. As a communication system between management and the outside salesmen, the compensation plan was found to be a factor in the profitability of the firm. A significant association was found between the presence of a profit- fitability factor in the outside salesmen compensation plan and the relative profitability of a firm in this industry. However, no significant association was found between profitability and the incentive method used, i.e., salary- Leonard Dalton Orr bonus, salary-commission, etc.; nor between profitability and the level of reward as measured by the proportion of total cash compensation paid to outside salesmen to Gross Profit earned by the firm. COMPENSATION OF SALESMEN IN THE METALS SERVICE CENTER INDUSTRY AS A FACTOR IN THE PROFITABILITY OF THE FIRM By Leonard Dalton Orr A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation Administration 1967 £;?4%§Q%; 637 KP” ‘ Q ACKNOWLEDGMENTS This thesis could not have been written were it not for the contributions made by a great many people--so many that individual mention of all is not possible. To each of them and to all of them collectively, I say a sincere "thank you." I wish to acknowledge specifically a debt of grati- tude for the contribtuion made by the Steel Service Center Institute--not only for the fellowship which made the study possible-—but also for the cooperation in every way extended to me by Mr. Robert G. Welch, president of the Institute, and his fine staff. To each of the executives of the Institute member companies that cooperated in the study goes my sincere thanks for the time and effort given to the project. My committee, Doctors w. J. E. Crissy (chairman), J. Don Edwards, and Alden C. Olson, gave of their time and knowledge freely. Their thoughtful and constructive criticism is greatly appreciated. Special thanks go to Dr. Crissy as chairman for the many hours spent in con- sultation and discussion with me as the study progressed-- he alWays went "the full distance." Finally, to my wife, Mary Jane, whose confidence never flagged—-though mine did on occasion—~thank you. ii TABLE OF CONTENTS ACKNOWLEDGMENTS . . . . . . LIST OF TABLES . . . . . . . LIST OF FIGURES . . . . . LIST OF APPENDICES . . . Chapter 1. INTRODUCTION. . . . . . Purposes of the Study. . Interest and Discontent . The Evolution of the Modern Ste Service Center . . . 2. SALESMAN COMPENSATION CONCEPTS A Reward System. . . A Control System . . . A Communication System 3. PATTERNS OF COMPENSATION OF OUTSIDE SALESMEN IN THE STEEL SERVICE INDUSTRY . . . . . . Fringe Benefits. . . . Expenses . . . . . Fixed Compensation. . Incentive Compensation . el CENTER A. PATTERNS OF COMPENSATION OF INSIDE IN THE STEEL SERVICE CENTER INDUSTRY. Fringe Benefits. . . . Expenses . . . . . . Incentive Components . . iii SALESMEN Page 11' vii viii |._.l \o H+4 l6 16 20 2A' 26 28 A7 7“ 75 88 89 9o 90 Chapter 5. PROFITABILITY AND SALESMAN COMPENSATION Profitability Measurement. Analysis of the Data Control. . . 6. CONCLUSIONS AND RECOMMENDATIONS. Interrelationships APPENDICES BIBLIOGRAPHY iv Page 98 108 130 1314 134 1149 1814 Table l. 10. LIST OF TABLES Page The Incidence of Selected Insurance Cover- ages in the Metal Service Center Industry, 196“ . . . . . . . . . 30 The Incidence of Non-contributory Plans of Selected Insurance Coverages in the Metal Service Center Industry, 196A . . 32 The Incidence of Non-contributory and Shared Cost Plans of Selected Insurance Coverages in the Metal Service Center Industry, 196A . . . . . . . . . 33 Incidence of Pensions and Funding Methods for Pensions in the Metal Service Center Industry, 1964. . . . . . . No Company Practices with Regard to Auto Travel Expenses in the Metal Service Center Industry, 1964. . . . . . . 51 Compensation Methods in the Metal Service Center Industry, 1964 (Outside Sales- men) 0 o o o o o o o o o o o 79 Compensation Methods in the Metal Service Center Industry, 1964 (Inside Sales- men) 0 o o o o o o o o o I o 91 The Distribution of Respondents that Furn- ished Profitability Data by Size Categories . . . . . . . . . . 107 Distribution of Respondents According to Type of Outside Salesman Compensation Plan and Profitability Group . . . . llO Distribution of Respondents According to Type of Outside Salesman Compensation Plan and Profitability by Quartile . . lll Table 11. The Distribution Among Profitability Groups of Respondent Companies Classi- fied by Type of Compensation Plan for Outside Salesmen . . . . . . . vi Page 118 LIST OF FIGURES Figure l-a. Replacement Reimbursement for the Use of Salesman Owned Cars (Travel Rate 1000 Miles per Month) . . . . . l-b. Replacement Reimbursement for the Use of Salesman Owned Cars (Travel Rate 1500 Miles Per Month) . . . . . l-c. Replacement Reimbursement for the Use of Salesman Owned Cars (Travel Rate 2000 Miles per Month) . . . . . vii Page 6A 65 66 LIST OF APPENDICES Appendix Page A. The sample 0 O O O O O O O O O O 150 B. The Questionnaire. . . . . . . . . 165 C. SSCI Report of Operations and Operating Ratios Questionnaire. . . . . . 177 D. Excerpts from the SSCI Survey of Sales— men's Compensation-~1959 . . . . . 182 viii CHAPTER I INTRODUCTION Purposes of the Study As proposed, this investigation of salesman compen- sation in the Steel Service Center Industry had three fundamental objectives: 1. To identify and classify current salesman compen- sation practices and the kinds of incentive plans for salesmen in use in this industry. To study the relationships of differences in practice to distinguishable characteristics of the service centers, e.g., size of operation, product-service mix, etc. To assess the congruence of compensation and incentive practices with management's strategic and tactical plans for profitable operation of the firm. Interest and Discontent That this study was underwritten by the Steel Ser— vice Center Institute is an indication of the importance that management in this industry attaches to this subject. That salesman compensation is a subject of intense interest to management generally is attested to by the almost simul- taneous publication of three extensive studies in this area of management responsibility in 1965.l Two of these studies, by RIA and by Dartnell Corpor- ation, investigated salesman compensation practices among firms in the United States. The Tack study reported on salesman compensation practices in Great Britain. The RIA study, for example, covered the data contained in useable questionnaires from 2,000 of the 10,000 Institute members that were polled-~manufacturers, wholesalers, retailers, and service firms in a wide spectrum of two digit SIC in- dustries.2 A summary and review of these studies in Sales Management magazine characterized their findings by saying "they all point in the same direction-~to a mixture of security and gamble instead of the old-fashioned and simple straight salary or straight commission."3 Not only is the subject of salesman compensation of current interest to management, but managers are rather dissatisfied with the salesman compensation plans they are lSales Compensation Practices--An RIA Survey (New York: The Research Institute of America, Inc., 1965); Compensation of Salesmen (Chicago: Dartnell Corporation, 1965); Salesmen's Pay Incentives and Pensions (London, England: Tack Research, Ltd., 1965). 2RIA, ibid., p. 1. 3Philip Salisbury, "Compensating Salesmen," Sales Management, (January 21, 1966), p. 46. using, and they have been for some time. In 1953, Tosdal and Carson found that "one out of four sales managers was actively dissatisfied with his company's compensation plan and was seeking improvement. There was a substantial dis- satisfaction with all plans."1 In 1965 the RIA study found "Only 13% of the companies were willing to rate their cur— rent plans 'Excellent'; 21% actually labeled their plans 'Unsatisfactory'."2 Although "unsatisfactory" and "actively dissatisfied" may actually represent different criteria and thus may not describe comparable states of discontentment, it would appear that the dozen years between these two surveys have brought little upgrading of management's evaluation of the performance of salesman compensation plans in implementing its strategic and tactical planning. Yet salesman compensation plans have not remained static. The RIA report points out that Despite almost five years of rising sales and today's record-breaking profits, one out of every three com- panies made some change in its method or basis of sales compensation recently—-and one out of five still finds its plan "unsatisfactory".3 1Harry R. Tosdal and Waller Carson, Jr., Salesman's Compensation (Boston: Graduate School of Business Adminis- tration, Harvard University, 1953, Vol. I), p. 329. 2Sales Compensation Practices--An RIA Survey, op. cit., p. 1. 3Ibid. The RIA report describes these changes as . . . milling around . . . two-thirds of the changes involved the proportions of salary and incentive. Without further data, one might jump to the con- clusion that this is a continuation of the long- term trend to more—fixed, less-variable sales com- pensation. But apparently this trend reached a plateau at least three years ago. The changes in proportions since then are almost equally divided among "more salary," "more incentive," and "about the same" . . . They (managers, Ed.) were equally uneasy with the usual compensation plans ranging from itraight salary thru straight commission The RIA study included a poll of the salesmen employed by the cooperating companies. This survey indicated that these salesmen were somewhat more content with current compensation practices than their bosses. "Almost one- fourth (23%) rated their current pay plan 'Excellent' while less than one in five (19%) said 'Unsatisfactory'."2 The percentages in parentheses are from Sales Management's summary and were not included in the published RIA report.3 The same source indicated that 13,000 salesmen were polled.“ These salesmen were asked by RIA what proportion of salary should be in a salary-incentive plan. The answer was "half of the salesmen said salary should be 75% or more; almost nine out of ten wanted at least 50% salapy."5 llbid., p. 2. 21bid. 3Salisbury, op. cit., p. 52. “Ibid., p. 50. SRIA, op. cit., pp. 2-3. If a head-count of substantial changes in salesman compensation plans is actually indicative of management's dissatisfaction, this study of salesman compensation practices in the Metals Service Center industry would seem to show that its management is even more dissatisfied than the RIA survey found management in general to be. The period 1960-1965, inclusive, was selected for compari- son with the similar period used in the RIA study. This Survey Period was divided into First Half (1960-1962, inclusive) and Second Half (1963-1965, inclusive). Of the Metals Service Center companies which cooper- ated in this study, slightly more than 20% (13 of 60) re— ported making thirteen major changes in the First Half of the Survey Period in their compensation plans for outside salesmen. In the Second Half, almost 50% (28 of 60) of the respondents reported making thirty-one such changes-- three companies made two major changes in their plans in the latter three year period. Ten of these respondents were making a second major change in their plans following changes made in the First Half, and eighteen were making their first change during the Survey Period. Thus, over one-half of the responding companies (31 of 60) made forty-four major changes in the plans under which they compensated their outside salesmen in the six year Survey Period 1960-1965, inclusive, and slightly over 20% (13 of 60) made two major changes in that period of time. There appeared to be no significant association be- tween company size as measured by annual net sales and the proportion of companies in each of three size categories1 that made major changes in their outside salesman compen- sation plans. Approximately one—half of the companies in each size category made such changes. However, management in this industry was not "milling around” in making these changes. Of the thirty-one re- spondents that changed their plans in this Survey Period, twenty-eight made changes that moved toward a greater pro- portion of incentive compensation to fixed compensation in their plans, two moved toward a greater proportion of salary, and one made a change that did not effect the pro- portion of incentive compensation in its plan. Further— more, the changes reported by more than two-thirds (21 of 31) of the responding companies which reported major changes in their outside salesman compensation plans involved add- ing a profitability factor, or increasing the importance of a profitability factor already incorporated in their plans. These profitability factors ranged in concept from simple profit sharing to "return on investment." 1Throughout this study, for statistical purposes, the respondent companies were divided into three size categories based on annual net sales--1ess than $5 million (21 companies), at least $5 million but less than $20 million (21 companies), and more than $20 million (18 companies). For some purposes, a dichotomy of less than $10 million and $10 million or more was used. See Appendix A for a detailed discussion of the sample. The increased rate of changes noted above in the Second Half of the Survey Period seems to reflect the acceptance by the industry of trends toward: (1) pro- portionately more incentive in compensation plans for out- side salesmen, and (2) profitability based incentive com- pensation. Of the nearly one-half (29 of 60) of the re- sponding companies that reported no major changes in their outside salesman compensation plans since 1959, ten indi- cated that their plans already included a profitability factor.l Only four of these twenty-nine respondents used salary only plans and two used commission only plans. The remaining twenty-three of these respondents reported using plans combining salary with bonus components, or commission components, or both. Of the responding companies that had 196A annual net sales of less than $5 million (21 of 60), eleven reported making changes during the Survey Period in their compen- sation plans for outside salesmen. Of these respondents, 55% (6 of 11) reported adding profitability factors to their plans. Of the respondents in this size category that did not report changes in their plans during the Survey Period, lRobert G. Welch, President of the SSCI, in a letter to the writer dated January 24, 1967, points out that few of the member companies, prior to 1959, had accounting systems that produced figures on product line, item, or territorial profitability. A distribution cost analysis program was developed by SSCI in 1956, but for the first few years this type of information was avail- able only to a limited number of companies. 50% (5 of 10) already had profitability factors in their plans. Of the responding companies that had 1964 annual net sales of at least $5 million but less than $20 million (21 of 60), eleven reported making changes during the Survey Period in their compensation plans for outside salesmen. Of these respondents, 72% (8 of 11) reported adding profit- ability factors to their plans. Of the respondents in this size category that did not report changes in their plans during the Survey Period, 30% (3 of 10) already had profit— ability factors in their plans. Of the responding companies that had 1964 annual net sales of $20 million or more (18 of 60), nine reported making changes during the Survey Period in their compensation plans for outside salesmen. Of these respondents, 78% (7 of 9) reported adding profitability factors to their plans. Of the respondents in this size category that did not report changes in their plans during the Survey Period, 22% (2 of 9) already had profitability factors in their plans. On balance, at the end of the Survey Period, i.e., as 1966 began, approximately one-half of the reSponding companies in each size category had profitability factors incorporated in their compensation plans for outside sales- men. However, it would seem that the smaller companies, as a group, began to move toward profitability based com- pensation components for outside salesmen before the larger l The small sub-sample size involved here companies did. casts some doubt on the statistical significance of this observed difference, and conclusions should be drawn cautiously. The Evolution of the Modern Steel Service Center2 The history of metals service centers in the United States dates back to colonial times when "blacksmiths, wagonmakers and other craftsmen could obtain a few bars of iron, or hammered sheets, or a gross of cut nails from 'iron mongers' who stocked the products of English and Swedish mills."3 The first metals warehouse in America that was engaged solely in the distributive function as opposed to the production function was established in 1765 as Abeel Steel, Inc., of New York City. The name of this company appears on the membership roster of the Steel Ser- vice Center Institute for 1965-1966 cited below. One hundred and twenty years before Abeel began operations, the Saugas Ironworks in Saugas, Massachusetts, according to tradition, founded the domestic iron (and steel) industry 1See footnote, p. 7. 2Unless otherwise cited, this section of this thesis relies heavily on "All About Steel Distribution and Steel Service Centers," a reprint from Kaiser Aluminum News, Vol. 19, No. 5, published by Kaiser Aluminum and Chemical Corporation, 1962, 23 pages. 3"Stee1 Service Centers for Industry," 1965-1966 Roster (Cleveland, Ohio: Steel Service Center Institute, 19555: P- A. 10 by pouring its first iron pot in 16A5. This infant in- dustry during its first two hundred years was oriented toward local markets and had no problem of "less than mill order" quantities to contend with. Sales agents in New York and Philadelphia maintained and sold small inven- tories of foreign metal. Not until 1856-57, when Bessemer converters "went on stream," did the steel producing in- dustry reach mass-production proportions. A commercial process for the economical production of aluminum was patented in 1899. As the twentieth century began, the open-hearth pro- cess became the dominant technique in steel making and, coupled with the continuous strip mill that was introduced in 1924, set the stage for "preproduction" processing which has become a large element in the operation of a modern nmtals service center. Mass production and standard widths and lengths are "blood brothers" and "mill order quantity" is at least an economic "first cousin." The original steel warehouse operator was a wholesaler (when he was not acting as a retailer) and his modern counter- part, the metals service center, is still involved in the l uo,ooo metal users out "break bulk" process. An estimated of an estimated 200,000 use sufficient amounts of steel in a year to deal directly with the producing mills. The needs lKaiser Aluminum News, op. cit., p. 10. ll of the remaining 160,000 metal users are for smaller quantities, at longer and/or irregular intervals, and often with special alloy, size, or shape requirements. However, servicing these Special requirements of these smaller metal-using manufacturers accounts for only about 20% of the sales volume of the metals service center in- dustry. The remaining 80% of the industry's sales volume is accounted for by the large metal-using manufacturers who are direct mill buyers, but who also have some require- ments which best can be met by the centers. These re- quirements often involve "preproduction" processing-- cutting or shearing blanks or shapes, heat—treating, slitting, edging, flattening, bending, grinding, or other- wise performing what would be the "first operation" for ‘the manufacturer if standard shape and size metal were Inlrchased from the mill. The individual service centers arud their Steel Service Center Institute also have been Seilling actively the concept that "Cost of Possession" can Offifset the apparent savings of volume orders from the mills arm: that letting service centers "hold inventory" and pro- Vixie "preproduction" processing results in lower total cost despite the loss of volume discounts. Steel producers have 8~1C1ed in this effort. The Kaiser Aluminum News reprint cited on page 9. Cites a 1962 survey of this industry as the source for an Estimate that it is comprised of about 800 firms operating up¢ 12 about 1,400 plants or locations employing about A5,000 full-time people to process 35 million customer orders a year representing gross metal sales of about $3 billion 1 The Steel Service Center Institute, from annually. whose membership the sample for this study was drawn, is composed of member companies that distribute "85% of all the industrial steel products that reach the market through distributors."2 Two other associations, the National Association of Aluminum Distributors and the Copper and Brass Warehouse Association, are active in the more broadly defined "metal service center" industry. A substantial number of the steel service center firms also stock and supply non—ferrous metals such as aluminum, brass, bronze, as well as the more "exotic" metals such as titanium. Gross membership in two or more associations is not unusual. The SSCI supplies statistical reports to its member- Shiqa, sponsors association insurance plans, sponsors edu- cational programs, and otherwise promotes the welfare of Its Inembership and the entire industry. Much of the data upcui which this thesis is based simply would not have been acCessible without the cooperation of the Institute. Domestic shipments (actually receipts by metals seIWIice centers) of industrial steel products to metals \_1 1Kaiser Aluminum News, op. cit., p. 9. See Appendix A fWXr additional industry size information. 21bid., p. 15. 13 service centers totaled 10.0 million tons in 196A which represented 16.4% of the total domestic producer shipments of this category of steel products for the year. When merchant products and miscellaneous and semi-finished products are added to this total, the grand total of steel products shipped to steel service centers reached 15.5 million tons or 18.3% of such products that reached con— sumers in 19611.1 The modern metals service centers and their prede— cessors are and have been primarily concerned with the wholesale distribution of steel and other metals. Thus, these firms are classified under SIC categorization as wholesalers and are so classified in the RIA study pre- viously cited. But, today, "better than 60% of all the .metals they handle now undergo processing of some sort or devote much time to activities that do not lead directly ‘tC> greater sales volume. The straight salary plan may not CDfEEer incentive to the salesman, but the manner in which it 143 administered, especially the apparent criteria upon Which salary increases are. based, is an "incentive plan" 111 a very real sense to the salesman. 1Stanton and Buskirk, op. cit., p. 377. 2A A Communication System A salesman compensation plan, then, communicates management's objectives for the firm to the salesman. More precisely, it communicates some message to him--the content of the message as he receives it may or may not correctly inform him of management's objectives. Furthermore, the compensation plan is not the only communication system be- tween the two parties. Setting aside the opportunities for misunderstanding inherent in any communication system, the messages that are flowing through the multiple systems (direct supervision, "grapevine" or unofficial system, etc.) may, in fact, be conflicting. Assuming rational behavior (in an economic sense) on the part of the salesman (and if he does not act rationally .in this sense, the whole concept of money incentive com- Laensation falls into ruins), he will act to further his own iriterests (presumably, at least up to a point, to increase 1Histotal income). When the messages concerning company Olbjectives that he receives through at least the official <3PLannels (such as the compensation plan and supervisory Personnel) are congruent with his own personal objectives, 11E! will act in a manner-that will also help to attain 't11<>se company objectives. The kind of compensation plan is not important in allci of itself, but the potential of that plan to communi- QEfte to the salesman that portion of the firm's objectives 25 on which management wishes to have him concentrate his ef- forts for attainment ii important. However, the compen- sation plan is only one communication system and cannot carry the whole burden of communication and control in the absence of a coordinating selecting, training, and supervising program. CHAPTER 3 PATTERNS OF COMPENSATION OF OUTSIDE SALESMEN IN THE STEEL SERVICE CENTER INDUSTRY For the purposes of this investigation, compensation was separated into four components: fringe benefits, fixed compensation, incentives, and expenses. The first three components are clearly compensation. However, the last category, expenses, is not usually classi- fied as a component of compensation. They were so classi— fied in this study because the personal use of a company car (or, alternatively, a liberal allowance for the cost of cuoeration of the salesman's car) represents a financial tnenefit to the salesman. Furthermore, depending upon the degree of control exercised by management, the entertain- Inerit expense allowance could also represent a financial benefit to the salesman. As a rather extreme example of entertainment expense alélxawance contributing financial benefit to the salesman, it: inas found in one instance that company practice allowed the salesman to keep any unspent portion of the monthly entertainment allowance allotted to him and gave him essentially full control of these expenditures. As it tL¥P11ed out this practice was atypical. The typical practice 26 27 in the industry was found to be relatively close manage- ment control and review of entertainment expenditures by salesmen. The expense component of compensation is dis- cussed more fully later in this chapter. While it would be useful to identify the patterns used in compensating salesmen in this industry as a matter of information, the major purpose of this investigation is to study the effect on company profitability of incentive (bonus and commission) compensation. By examining company practices in connection with all four compensation com- ponents it should be possible to determine areas where some firms might enjoy differential advantage in attracting and retaining the more proficient salesmen in the industry. .If, in fact, such areas of differential advantage do exist ‘they must be evaluated in assessing the effect on company Ixrofitability of incentive compensation. If a high degree of disparity exists with regard to a particular component of compensation, it may be presumed tllert differential advantage in attracting and retaining the nublre proficient salesman may be present. Conversely, if a high degree of uniformity of practice with regard to a particular component of compensation is found, it is un- Jdilcely that differential advantage accrues to one firm over anOther because of its practices with regard to this com- F“3r1ent and, consequently, the effect on company profit— ability should be nil. 28 Fringe Benefits Specific consideration of fringe benefits as compen- sation to the outside salesman was restricted to two cate- gories: insurance plans and pension (retirement) plans. In the questionnaire an open category, "other," was included to allow respondents to indicate other benefits they considered to be "fringe benefits." The "other" category was almost completely ignored. Those few respon- dents who checked "other" mentioned country club member- ships for selected, mostly senior, salesmen and the use of high prestige model automobiles for salesmen who met cer— tain performance criteria. The recently released Research Institute of America study of salesmen's compensation states that among whole— sale distributors of steel, aluminum, and other metals "where salesmen's pay includes some element of salary" 90% allow six or more paid holidays and 76% give one to four weeks paid vacation based on length of service. Of the companies in this industry who responded to the RIA questionnaire, 80% indicated that their compensation plan 1 For those for salesmen included an element of salary. salesmen who receive no salary component in their compen- sation, "paid holidays" and "paid vacations" are meaningless terms and have no application to their situation. lSales Compensation Practices--An RIA Survey (New York: The Research Institute of America, Inc., 1965), p‘ 630 29 Insurance Benefits The incidence of availability and the extent to which the firm shared the cost of four kinds of insurance cover- age were investigated: life insurance, hospitalization, sickness and accident indemnity, and disability income continuation (see Tables 1, 2, and 3). Of the respondents to the questionnaire, A3% (26 of 60) made available all four coverages, 80% (A8 of 60) made available three or more coverages, and all of the companies made available two or more coverages. Almost all of the responding companies (59 of 60) made the two basic cover- ages, hospitalization and life insurance, available. Of the respondents to the questionnaire, 10% (6 of 60) made available and fully paid the cost of all four coverages, 37% (22 of 60) made available and fully paid the cost of three or more coverages, 55% (33 of 60) made available and fully paid the cost of two or more coverages, and 73% (AA of 60) made available and fully paid the cost of at least one coverage. Thus, only 27% (16 of 60) respondents said that they did not fully pay the cost of even one coverage. When the criterion was broadened to include those respondent companies who shared the cost of the coverages in addition to those who fully paid the cost, 32% (19 of 60) of the respondents offered and contributed a part or all of the cost of each of all four coverages, 68% (A1 of 60) offered and contributed a part or all of the cost of 30 .ooapson was maumsvcfi on» CH :mEmmHmm mcfimpso on mmwmpm>oo mmmzp mo mpHHHanHm>m one .soapmscfipsoo oEoo:H mpHHHnmmHU was .mpHCEoUCH pcmcfioom new mmmcxofim .QOHpmNHHmpHdmon .mochSmsH mefia who; mommam>oo ompomamm one "mBoz ooa ma OOH Hm OOH Hm ooa om m spoon he mm me am AH me 6H om we m posed ea om OH mm 5 me a me pm nomnaoeoo : HH< e .moo R .moo R .moo e .moo oaoz so confide: owe ooHHHaz me noaosdsoo confide: owe 6oz ppm. ooze noon woaocoonom oaommwm>< ooHHHaz me HH< mmHmm pmz stcc< ammfi .zoma .mhpnsccH ampsmo mofi>hmm Hmpmz mnp CH mommam>oo mocmssmsfi Umpomamm mo moCmUHoCH MQBII.H mqm¢8 31 three or more coverages, and all but one respondent company offered and contributed part or all of the cost of two or more coverages. All of the respondent companies offered and contributed part or all of the cost of at least one coverage. Analysis by size of company (annual net sales) indi- cates that smaller companies were more likely to pay the full cost of coverages than larger companies (see Table 2). However, they were not more likely to offer the coverages nor were they more likely to contribute a part or all of the cost of coverages (see Table l and Table 3, respectively). An g priori hypothesis might be that those companies which included no salary component in their compensation plans for their outside salesmen (hereafter they will be called commission plan companies) would follow different practices with regard to offering and paying for these in- surance coverages. There were four such companies among the respondents. Two of the four made available all four cover- ages. One of them fully paid the cost for the four cover- ages, the other fully paid for three coverages and shared the cost of the fourth. The remaining two companies offered three coverages. One of them fully paid two coverages and shared the cost of the third. The other company shared the cost of two coverages and asked the salesman to pay the cost of one coverage. These data would seem to suggest the com- mission plan companies were more likely to offer and pay 32 .omHGSpm mm: mapmspcfi map CH cosmmHmm mUprso on mommpm>oo mmmsp mo muHHHom uHHneo one .QOHpmssHpcoo oEoosH muHHHnmch was .muHchUcH pcooHoom com mmmc IxOHm .QOHpmNHHMpHQmos .oocmLSmsH oMHH who: mmwmmm>oo UmpomHom one “meoz mm 0 mm A :H m Hm 0H 6202 we NH no :H mm mH me e: H onmoH he mm 5 mm HH He mH mm mm m onmoH o< mm m mm A we OH mm mm m unmoH o< m H OH m 3H m 0H m nomoaoeoo e HH< e .moo e .mou e .moo e .moo oaoz so ooHHHHz owe ooHHHHz me mochosoo oHsd Hooaaoo ooHHHHz owe ooz pom none nnoH onocoanom HHHsm onoo one ooHHHHz me HH< oHooHHs>< one: mmamm pmz Hmscc¢ :wma .zmmH .mmpmsch mopsoo ooH>mmm Hmpmz ozp CH mmwmpo>oo mocmHSmcH UmpomHmm mo madam muonsnappcoolcos mo mocmvfiosfi osell.m mum<& 33 .UoHospm no: mnpmsvnH on» nH cosmoHow oUHmpso 0p nowmmo>oo omonp mo epHHHanHm>m one .noapmanpnoo oEoonH mpHHHnmmHU onm .szQEoenH pnoUHooo cnm moonxOHn .COHpmNHHmpHQmon .oonmLSOQH oMHH opos mowopo>oo UopooHom one ”meoz OOH Hm OOH OO H omOoH o< OOH OH OOH Hm OO Om OO OO O onnoH o< Oe OH eO OH NO MH OO H: m onOoH o< mm O mm e OO O mm OH nomnsoeoo e HH< O .OOO e .mOO H .OOO O .noO ooponm no ohoz no COHHHHZ oma COHHHHZ ma moHCMQEoo UHom mnomEoo oOHHHHz OmO ooz esm some nnoH meHOeoanom OHHOE onoO one oOHHHHz OO HHO oHoOHHo>< one: noHOm eoz Hoseo< OOOH .OOmH .mppmsone nopnoo o0H>pom Hopoz onp nH momono>oo oonmuSOQH copooHom mo manq pmoo Uoponm cam mmousnanpnoolnon mo oonooHonH onell.m mqm shared the cost. 36 Summary and Conclusions-- Insurance Benefits The insurance coverages that have been discussed were not special offerings to the outside salesmen but were offered to salaried employees of the company as well. It has been noted above that smaller companies were no more likely to offer a specific coverage than larger com- panies but that they were more likely to pay the full cost of the coverage. This was consistent through all of the coverages. A purely mechanical feature of group plans sold commercially may explain the greater frequency of contributory plans among larger companies. Individual coverage amount limits under group life plans sold by commercial companies, for example, are deter- mined by the size of the group. Requirements vary somewhat among the states, but "true" group limits and rates begin at 25 to 50 lives. For groups smaller than the required size, limits of coverage may be reduced. For groups of ten lives, for example, and again for groups of five lives, progressively smaller limits may be set. The rates are in- creased, but not in proportion to the coverage limit de- crease. The net effect of rate and limit changes where only a relatively few lives are involved is a total pre- mium that management often accepts on a non-contributory basis. On the other hand, where a larger number of lives and higher coverage limits are involved, the resulting 37 premium is not acceptable to management on a non—contri- butory basis. Often the company chooses to pay for a certain schedule of individual coverage and the higher coverage limit is made available to the individual on a contributory basis. The same or similar requirements apply to the other coverages. Possibly other factors also are involved in the observed characteristic of higher frequency occurrence of non-contributory plans among smaller companies than larger ones, but it is suggested that the mechanical restraint discussed above plays a substantial role. The four insurance coverages investigated are widely offered in this industry. All of the respondent companies offered at least two of the four averages to their outside salesmen and four out of five of the com- panies offered three or more coverages. Essentially all (98%) of the respondent companies offered and contri- buted a part or all of the cost of two or more coverages, and two companies out of three did so on three or more coverages. Nearly three companies out of four fully paid for at least one coverage, and over one-half of them offered and paid all the cost of two or more coverages. Life insurance and hospitalization are basic coverages which have been offered by commercial carriers on a group basis more widely and for a longer time than sickness and accident indemnity and disability income 38 continuation. These two basic coverages were offered by essentially all of the companies responding to the questionnaire (one company of the sixty respondents did not offer life insurance). Eight of the companies (lA%) required the salesmen to pay the full cost of one or the other of these coverages, but none of them required him to pay all of the cost of both of these coverages. About one-half of the companies paid the full cost of both coverages. There appeared to be little difference in company practice with regard to insurance coverages between com- panies which compensated their salesmen only with a com- mission plan and those which included a salary component in their compensation plan. It was noted that smaller companies were more likely to offer insurance coverages on a non—contributory basis than larger companies, although they were no more likely to make the coverages available on some basis than were larger companies. It was suggested that this might be partially explained by the inherent technical characteristics of commercial group plans. There seemed to be little room for differential ad- vantage among firms with regard to insurance benefits which might enable some firms to attract and retain a dispro- portionate share of the more proficient salesmen in the industry. The terms of coverage variable among specific 39 plans was not studied, but it is difficult to impute sufficient knowledgeability of insurance coverage to the non-insurance professional to make this an important factor in the salesman's choice. Pension Plans The pension plans reported by respondents were classi- fied as fixed contribution plans or profit sharing plans. Some companies, 15% (9 of 60) of the respondents, reported plans that combined components of both kinds of plans (Table A). The fixed contribution plan, from an employer's view- point, entails an annual money commitment that is deter- mined by the level of benefits offered, the number of participants, and the employee contribution formula, if any. Although there are usually provisions written into the plan that provide limited relief from the money commit- ment in times of financial stress, and the right to dis- continue the plan is almost invariably reserved to the em- ployer, his contribution to the plan represents a fixed cost that is relatively independent of profit earning and is extremely difficult to reduce in times of low profit— ability. On the other hand, the profit sharing plan is de- signed to tie the employer's contribution to the earning of profit by the company. The employer's contribution to the plan is set by a formula based on the level of profit o O... x ‘ ~ -- k... u DNQL ~ \ x \ a.\. A0 .wnfivnsom mo omSOOon ROOH nmnp onoE op ouo< "ouoz .x. OOH OH OOH OH OOH O OOH Oe HOooe OO O HO O mm O OO OH OnoosoHeoooO OO O OO HH eO O OO ON anospHnooooncoz “com: moz pnonoa IEoo QOHpanLpnoo onHm 90 anm QOHpsn -HnoooO Oome ononz OOH NH OOH HN OOH OH *HOH OO Hoooe ON O OH m e H eH O OoHO comm mo mucoQOQEoo NH N ON O O: O ON OH OHoo emHN onnonm eHOonN OO OH NO OH OO O OO Hm OHOO oOHO COHosOHnoeoO OoxHa "non o>om OOH OH OOH HN OOH HN OOH OO HOooe O H O O ON O NH e oOHN oz oeem OO AH OOH HN He OH OO mO oOHa oonoON men: e .moo e .moo m .moo n .moo opoz no soHHHHz ONO ooHHHHz OO OOHooaaoO ooHHHHz ONO ooz osm some nnoH moHOooamom cOHHHHz OO HH< noHOm ooz Hosoee OOOH .zmmH .zppmzone nounoo oOH>pom Houoz on» nH mnOHmnoQ pom ovonpoe wnaonse ono mCOHmnoQ mo oonowfiocHll.: mqmee Al the company earns in a stated period of time. Consequently, the money commitment is less rigid and varies more or less directly with profit. During the personal interviews which were held with executives of the respondent companies where concern over fixed costs was voiced, it was usually mentioned by the executives of the relatively smaller companies. This was not an unexpected development, but some §_priori hy- potheses are suggested by their concern. In the null form they are: 1. Company size would not affect the decision to offer a pension plan. 2. Where pension plans were offered, company size would not affect the choice of the kind of plan to be used, i.e., fixed contribution or profit sharing. 3. Where fixed contribution plans were offered, company size would not affect the choice of contributory versus non-contributory plans. Of the responding companies, only 12% (7 of 60) re- ported that they did not have a pension plan in which thier outside salesmen participated. Among companies with annual net sales of $20 million or more, 9A% (17 of 18) reported a pension plan. Among companies with annual net sales of at least $5 million but less than $20 million, 100% (21 of 21) reported a pension plan. Among companies with A2 annual net sales of less than $5 million, 71% (15 of 21) reported pension plans. After making due allowance for the small size of the sub-samples, it is apparent that companies with annual net sales of less than $5 million did offer pension plans significantly less often than those companies with annual net sales of $5 million or more. The first g priori hy- pothesis is rejected. Of the respondents reporting a pension plan in which their outside salesmen participated, 75% (A0 of 53) re— ported fixed contribution plans, and A2% (22 of 53) re- ported profit sharing plans. These percentages total to more than 100% because 17% (9 of 53) reported combination plans that included components of both kinds of plans. Of the responding companies which reported pension plans, 88% (15 of 17) of those companies with annual net sales of $20 million or more offered a fixed contribution plan or a fixed contribution component of a combination plan; 76% (16 of 21) of those companies with annual net sales of at least $5 million but less than $20 million offered a fixed contribution plan or a fixed contribution component of a combination plan; and 60% (9 of 15) of those companies with annual net sales of less than $5 million offered a fixed contribution plan or a fixed contribution component of a combination plan. A3 Where a pension plan was offered, the incidence of fixed contribution plans or fixed contribution components of combination plans was significantly higher as company size increased. The presence of combination plans which were reported by some of the respondents did not present any problem in evaluating the incidence of fixed contribution plans or fixed contribution components of combination plans. How- ever, in evaluating the incidence of profit sharing plans and profit sharing components of combination plans it was necessary to distinguish between them. When the characteristic criterion was "offers a pro- fit sharing plan or a profit sharing component of a combi- nation plan," the incidence of the characteristic was probably independent of company size measured by annual net sales. Of those companies offering pension plans whose annual net sales were at least $20 million, Al% (7 of 17) offered profit sharing plans or profit sharing components of combination plans. Among such companies with annual net sales of at least $5 million but less than $20 million, 38% (8 of 21) offered profit sharing plans or profit sharing components of combination plans. Among such companies with annual net sales of less than $5 million, 50% (7 of 1A) offered profit sharing plans or profit sharing components of combination plans. But, when the characteristic criterion was changed to "offers a profit sharing plan only," an association AA between company size and the incidence of profit sharing plans as the only method of funding the pension plan did emerge. The presence in the combination plan of a fixed contribution component establishes a fixed money commit- ment. The presence of the profit sharing component may enhance the probable retirement value of the combination plan but it does not change the fixed money commitment. A company that wishes to avoid a fixed money commitment would not choose either a fixed contribution plan 93 a combination plan. Among the respondent companies which offered pensions, 12% (2 of 17) of those companies with annual net sales of at least $20 million offered profit sharing plans only, 2A% (5 of 21).of those companies with annual net sales of at least $5 million but less than $20 million offered pro- fit sharing plans only, and A0% (6 of 15) of those companies with annual net sales of less than $5 million offered profit sharing plans only. The incidence of fixed contribution plans and fixed contribution components of combination plans was found to. increase as company size increased and the incidence of profit sharing plans as the only method of funding the pension plan was found to decrease as company size in- creased. The second a priori hypothesis is rejected. Where fixed contribution plans were used (either alone or as fixed contribution components of combination plans), A5 65% (26 of A0) were non-contributory plans. Among those companies with annual net sales of at least $20 million, 60% (9 of 15) offered non-contributory plans; among those companies with annual net sales of at least $5 million but less than $20 million, 69% (ll of 16) offered non-contri- butory plans; and among those companies with annual net sales of less than $5 million, 67% (6 of 9) offered non- contributory plans. The difference in incidence of non- contributory plans is probably not significant and the third §_priori hypothesis should be accepted. Of the four commission plan companies, all offered fixed contribution pension plans. One plan was non-contri- butory and three were contributory. Summary--Pension Benefits Pension plans are relatively widely offered to out- side salesmen in this industry. Only 12% (7 of 60) com- panies reported that they did not have a pension plan in which their outside salesman participated. Although the sub-samples are small and, consequently, relatively large differences in incidence of a character- istic were not significant, an association between company size and the inclusion of a pension in the fringe benefit package did exist. The larger companies were more likely to offer pensions than the smallest companies (annual net sales of less than $5 million). Furthermore, the larger companies were more likely to offer plans which were either A6 fixed contribution plans entirely or combination plans with fixed contribution components. The smaller companies were more likely to offer profit sharing plans only. When smaller companies did offer fixed contribution plans they were as likely to offer them on a non-contribu- tory basis as the larger companies. If the profit sharing only plans are classified as "non-contributory," 7A% (39 of 53) of the reported plans required no contribution by the salesmen. There was no significant policy difference concern- ing the offering of pension plans to outside salesmen be- tween the commission plan companies and those companies which included a salary component in their compensation plans. Pension practices among these companies seemed to offer little opportunity for differential advantage in attracting the more proficient salesmen, especially among companies whose annual net sales were at least $5 million. The smallest companies were less likely to offer pension plans, although almost three out of four of them did so, and their plans were more likely to be profit sharing only plans. Here, again, it is difficult to ascribe to the salesman sufficient knowledge to distinguish between the two funding methods as an important factor in his choice of companies. A7 Expenses Expenses incurred by outside salesmen in the steel service center industry in the course of their selling activities customarily are of two kinds. Expenses are incurred by the salesmen for necessary travel in their territories and to promote customer good will. Travel Expenses Although these salesmen sometimes incurred expenses for airplane and railroad travel, together with some lodg- ing and meals away from home expenses, primarily travel expense meant automobile travel expense in this industry. Automobile Expenses.--The use of company-furnished cars by outside salesmen in the metals service center in- dustry was the predominant practice. Almost two out of three of the responding companies, 62% (37 of 60), reported that all of the cars used by their outside salesmen were company-furnished. An additional 15% (9 of 60) reported that both company-furnished and sales- man-owned cars were used. The remaining 23% (1A of 60) of the respondents reported that only salesman—owned cars were used. Among this latter group were numbered three of the commission plan companies. The fourth commission plan company furnished company cars to some of their outside salesmen. Thus, only about one in five (11 of 56) of the responding companies which included a salary component in A8 their compensation plans for outside salesmen did not furnish company cars to gpy of their outside salesmen. The personal interviews1 conducted with executives of the companies which comprised the sample for this study disclosed several reasons for the dual practice of using both salesman-owned and company-furnished cars that was reported by nine responding companies. Some years ago the predominant practice in this in- dustry was the use by outside salesmen of their own cars, with or without reimbursement. Many companies when they began to furnish company cars to outside salesmen allowed the salesman the option of using his own car with reim- bursement for expenses incurred. Some salesmen, usually a minority, preferred to use their own cars with reimburse— ment. This option allowed the salesman freedom of choice as to the make and model of car he drove, and as to when he traded for a new model. The second reason for the existence of this dual practice was related to the trend in this industry in re- cent years toward larger companies. This growth in company size often was accomplished by merger of two or more com- panies or by the outright purchase of one company by an- other. Where practices with regard to the cars used by outside salesmen in the combining companies differed, they 1Executives from fifty-three of the sixty companies which comprised the sample were interviewed. A9 were often allowed to continue unchanged somewhat indefi- nitely. This was also true of other practices and policies, e.g., salesmen's incentive compensation. It merely re— flects the autonomy that is frequently allowed the combining companies in these situations, and the time lag which often occurs between legal combination and full integration of management. Another reason for the existence of this dual practice was related to the company's compensation plan for outside salesmen. One of the commission plan companies and some of the salary plus commission plan companies that responded to the questionnaire reported that not all of their outside salesmen were compensated according to their primary com— pensation plans. These exceptions, because of inexperience or because they sold in territories that would not support them on the primary plan, were compensated by a straight salary arrangement. Salesmen who devoted part of their time to supervision and product specialists often were compensated with straight salary or predominantly salary arrangements also. Such salesmen frequently drove company- furnished cars while the other salesmen drove their own cars. Some companies which furnished company cars met the problem of satisfying the salesman's preference for a particular make or model car by allowing him some latitude of choice, provided that any additional cost due to his 50 choice was paid by him. Dissatisfaction with this practice was voiced by a few executives because of hidden extra costs, such as for maintenance and repair, of the more expensive models and makes which some salesmen chose under this arrangement. As was mentioned previously, some companies which furnished company cars to their salesmen offered higher prestige model cars at company expense to salesmen who met certain performance criteria as an incentive for them to do so. It is apparent in Table 5 that the incidence of com— pany-furnished cars for outside salesmen's use increased with company size as measured by annual net sales. Of the responding companies which had annual net sales of $20 million or more, 72% (13 of 18) reported that only company—furnished were used by their outside salesmen. An additional 22% (A of 18) of these respondents reported that both salesman-owned and company-furnished cars were used. Thus 9A% (17 of 18) of the responding companies in this size category reported furnishing company cars to at least some of their outside salesmen, and only 6% (l of 18) reported that all cars used by their outside salesmen were salesman-owned. Of the responding companies which had annual net sales of at least $5 million but less than $20 million, 67% (1A of 21) reported that only company-furnished cars were used by their outside salesmen. An additional 10% .wcavnsop mo omSOQon Oooa non» once on mee< ”meoz* OOH OH OOH OH OOH OH OOH OO Hoeoe NH N O O O O O N ooomsoHHO omooHHz O OHOO NH N O H O H O O oocmsoHHO emHHoO OOHO e OHOO OO OH OO OH NO NH OO OO Oomsoaxm HHO OHOO ”Onoaaoo onp .oonmfinnsm omo3 memo OQOQEOQ omonz *HOH OH OOH OH OOH OH OOH OO Heeoe NH N: O MI OH m: HH w: some Oo oEoO OH O HO O OO O ON OH OHoo Ooosouaeoaaoo HO NH OO OH OO O HO ON OHOO OOOO OomooH ”opoz zone .oonmfinmsm opoz memo Onngoo oeonz 51 OOH OH *HOH HN OOH HN OOH OO HOOOO NN OI OH m: OH O: OH O: zoom no oaom O H ON O OO O ON OH OHoO memo eon301nosmonm NO OH OO OH OO OH NO OO OHoO OOOO eonmflnmseIOQOQEoo "on: noEmoHom e .moo O .moo a .moo O .moo Ono: so ooHHHHz ONO coHHHHz OO OOHsooaOO soHHHHz ONO ooz use case OOOH moHocoaOoO eoHHHHz OO HHO mmHmm sz HMSCCOQ, :wmd .OOOH .zapmsone popnoo ooa>nom Hopoz on» Ca momnono Ho>onp ouso 0p opowoa npaz movauomhm enmmEooll.m mqmee 52 (2 of 21) of these respondents reported that both sales— man-owned and company-furnished cars were used. Thus 76% (16 of 21) of the responding companies in this size category reported furnishing company cars to at least some of their outside salesmen, and 2A% (5 of 21) reported that all cars used by their outside salesmen were sales- man-owned. Of the responding companies which had annual net sales of less than $5 million, A8% (10 of 21) reported that only company—furnished cars were used by their outside salesmen. An additional 1A% (3 of 21) of these respondents reported that both salesman-owned and company-furnished cars were used. Thus 62% (13 of 21) of the responding companies in this size category reported furnishing com- pany cars to at least some of their outside salesmen, and 38% (8 of 21) reported that all cars used by their outside salesmen were salesman-owned. In the majority of the cases where a dual practice (use of both salesman-owned and company-furnished cars) was reported, most of the salesmen used company—furnished cars, e.g., one very large company appeared in this cate- gory although only 6% of its many salesmen exercised their option to use their own cars. Where company-furnished cars were used by outside salesmen (including the companies which furnished company 53 cars to only some outside salesmen), the cars were pre- dominantly leased by the company. Of these responding companies which reported furnishing company cars to their outside salesmen, 61% (28 of A6) reported the use of leased cars only. An additional 11% (5 of A6) of these respondents reported that they leased some cars furnished to their outside salesmen and owned some. Only 28% (13 of A6) of these respondents reported that they owned all of such cars. During personal interviews with executives of four of the five companies that reported a dual practice (some leased cars and some owned), it was reported that two companies were moving toward company-owned cars, one was moving toward all leased cars, and one was not moving intentionally in either direction. No executives of the fifth company were interviewed. The incidence of the use of leased cars probably increased as company size measured by annual net sales increased. At least the incidence of this practice among the largest companies was significantly higher than it was among the smallest companies. Of the responding companies which furnished cars to their outside salesmen and had annual net sales of $20 million or more, 71% (12 of 17) reported furnishing 5A leased cars only. An additional 12% (2 of 17) reported furnishing both company-owned and leased cars. Thus 82% (1A of 17) of the respondents in this size category reported that at least some of the cars furnished to their outside salesmen were leased cars, and only 18% (3 of 17) reported that they furnished company—owned cars only. Of the responding companies which furnished cars to their outside salesmen and had annual net sales of at least $5 million but less than $20 million, 63% (10 of 16) reported furnishing leased cars only. An addi- tional 6% (l of 16) reported furnishing both company- owned and leased cars. Thus, 69% (ll of 16) of the re- spondents in this size category reported that at least some of the cars furnished to their outside salesmen were leased cars, and 31% (5 of 16) reported that they furnished company-owned cars only. Of the responding companies which furnished cars to their outside salesmen and had annual net sales of less than $5 million, A6% (6 of 13) reported furnishing leased cars only. An additional 15% (2 of 13) reported furnishing both company-owned and leased cars. Thus, 62% (8 of 13) of the respondents in this size category reported that at least some of the cars furnished to their outside salesmen were leased cars, and 39% (5 of 55 13) reported that they furnished company—owned cars only. Where company-furnished cars were used by outside salesmen (including the companies which furnished company cars to only some outside salesmen), 87% (A0 of A6) of the responding companies reported that they paid all oper- ating expenses for these cars. Typically, credit cards were issued to the outside salesmen and gas, oil, incidental maintenance, etc. were charged to the company by the sales—_ men. Of the remaining six companies, four reported paying monthly flat dollar allowances to their salesmen to cover operating expenses, and two companies reported paying a mileage allowance for operating expenses. The incidence of the practice of paying all operating expenses where company-furnished cars were used by the out- side salesmen probably was independent of company size as measured by annual net sales, although four of the six companies which reported arrangements other than the simple payment of all operating expenses for the cars furnished to outside salesmen also reported annual net sales of $20 million or more. It should be noted, however, that even among the responding companies in this largest size cate- gory, 76% (13 of 17) simply paid all operating expenses of these company-furnished cars (see Table 5). If the payment of a flat dollar allowance or a mileage allowance actually 56 represented an attempt to control these operating expenses more closely, few of these companies were exhibiting much concern on this score. None of the responding companies that furnished com- pany cars to their outside salesmen (including those com- panies that furnished cars to only some salesmen) reported prohibiting the personal use of the company car by the salesman. However, various plans for recovering the.cost of personal use of the company car from the salesman were reported. These cost recovery plans ranged from simple "honor systems" which required the salesman to report and pay for personal travel in the company car, e.g., "the expense of personal use" and "gas and oil for personal travel," to more formal arrangements requiring either mileage payments (which were set at various levels by the companies from 2¢ per mile to 6¢ per mile) or flat dollar amount reimburse— ment, e.g., "$12.50 per month plus vacation expenses." Many of these cost recovery plans were tax inspired, i.e., to prevent some portion of the value of the car from being classed as income to the salesman because of his personal use of the car. Such plans were tailored to satisfy Internal Revenue requirements rather than to recover fully the cost of personal use of the car by the salesman. Probably the majority of the companies with formal plans charged mile— age I 57 It is clear that some "income" to the salesmen re- sulted from their personal use of the company cars, al- though the amount of such "income" varied among the com- panies and among the salesmen depending upon the amount of personal use the individual salesman made of his com- pany-furnished car. It is also clear that where company cars were furnished to the salesmen the cost of business travel was borne by the company—-completely by almost 9 out of 10 responding companies which furnished cars and to the extent of the allowances in the remaining six in— stances. Where salesman-owned cars were used by the outside salesmen (including those companies where only some sales- men drove their own cars), the mechanics of the plans used to reimburse the salesman for the use of his car varied rather widely among the companies. Furthermore, all four commission plan companies were included in this category, and they generally acted differently from those companies which included a salary component in their compensation plans for outside salesmen. Two of the commission plan companies did not reimburse their outside salesmen for the auto travel expenses they incurred, i.e., the salesmen paid their own auto travel expenses. The other two commission plan companies followed a dual practice with regard to these expenses. One of these dual practice commission plan companies paid an 58 outside salesmen a flat allowance of $100 per month to cover auto travel expenses if his territory was a branch office territory, but he paid his own auto travel expenses if his territory was a head office city territory. The other one paid the salesman a flat allowance of $A5 per month plus a mileage allowance of 3.5¢ per mile, if his territory was a head office city territory, but branch office outside salesmen drove company—furnished cars for which all operating expenses were paid by the company. Branch office outside salesmen for this company were usually salaried employees. The remaining nineteen companies where salesman-owned cars were used by the outside salesmen included a salary component in their compensation plans for outside salesmen. Eight of these were dual practice companies, i.e., some cars used by their outside salesmen were company-furnished, and eleven of these companies did not furnish company cars to any of their outside salesmen. No significant differences in practice were reported by these two kinds of respondents. Of these respondents, A7% (9 of 19) paid the salesman a mileage allowance to reimburse him for the use of his car for business activities. The rate (cents per mile) paid varied substantially among the companies. Monthly flat dollar allowances were paid by 21% (A of 19) of these respondents, and 32% (6 of 19) of these companies used a 59 combination plan, i.e., a monthly flat dollar allowance plus a mileage allowance for reimbursement. In order to be able to compare the practice of re- imbursing the salesman for the use of his own car with the practice of furnishing a company car, it was necessary to construct a model of the operation of reimbursement prac- tices. Lacking specific information on travel rates (miles per month driven on business activity) it was necessary to make some assumptions with regard to Operating expenses and vehicle replacement costs. These assumptions were: 1. Operating expenses for the kind of car typically used by these salesmen were estimated at $55 per month for 1000 miles per month business travel rate, $65 per month for 1500 miles per month travel rate, and $75 per month for 2000 miles per month travel rate. These expenses included gas and oil, tire replacement, insurance, and routine maintenance and repair. 2. Replacement of the vehicle was estimated at every two years for business travel rates of 1000 and 1500 miles per month and every year for a busi- ness travel rate of 2000 miles per month. 3. Business use of the salesman's car was estimated at approximately two-thirds of total use, per- sonal use at one-third of total use. As will be discussed later, this turned out to be a non- critical assumption. 60 A. It was estimated that reimbursement above oper- ating expense would accomplish replacement of the vehicle every two years if it equalled $75 per month ($1800 in two years) and would accom- plish replacement of the vehicle every year if it equalled $90 per month ($1080 in one year). Two-thirds of these amounts are $50 per month and $60 per month, respectively. No claim is made as to the level of accuracy of these estimates. Obviously, operating expenses will vary con- siderably among different geographic areas, for example, and the cost of replacing a vehicle will be influenced by the bargaining position and skill of the individual sales— man. However, it is suggested that these estimates are accurate enough to evaluate the plans used for reimburse— ment as to their general effectiveness in defraying the cost to the salesman for the use of his car for business travel, and for comparing the general effectiveness of these reim- bursement practices with the practice of furnishing a com- pany car to the salesman. A weakness of this approach is the lack of information as to the intent of the reimburse- ment plan, i.e., was the plan intended to reimburse the salesman completely for the use of his car, or was its in- tent to reimburse him only for actual operating expenses plus one-half or two-thirds of the vehicle replacement cost to reflect some personal use? However, the model is useful in spite of this weakness. 61 Certain general statements can be made about the three reimbursement practices that were used by these nineteen respondents. For instance, the flat dollar amount allowance method, once established for a given territory, probably minimizes bookkeeping, but it is rather inflexible unless the mileage driven varies very little from month to month. Furthermore, it invites the charge of unfairness among territories, especially when it is varied in amount by territory as was the practice usually followed. The mileage allowance method requres some bookkeeping, but it is easily understood and eliminates the charge of unfairness mentioned above. However, because it attempts to cover fixed costs which are time related (vehicle re- placement cost and, probably, insurance expense) and vari- able costs which are mileage related (gas, oil, maintenance and repair, tire replacement, etc.), it can cause diffi— culties. This method, assuming that a given amount of the fixed costs are to be paid by the company, will overpay at some travel rates (miles driven per month) and underpay at other travel rates. Two of the nine respondents that used this method used a graduated scale of reimbursement--10¢ per mile for the first 1000 miles and 6¢ to 8¢ for additional mileage in stipulated brackets. This practice, of course, minimizes the overpayment and underpayment weakness of this method. 62 The combination method--a flat amount allowance plus a mileage allowance meets the conceptual weaknesses of the other two methods. It recognizes the presence of fixed (time related) and variable (mileage related) costs and allows reimbursement related to a preselected level with regard to each kind of cost. 1 Seven of the nineteen companies discussed above (those which included a salary component in their compen- sation plans for outside salesmen) had annual net sales of $10 million or more. Of the seven: four used a combination plan of reimbursement to the salesman for the use of his car, two used mileage plans with reimbursement in the range of 5¢ to 9¢ per mile, and one used a flat amount allowance. The remaining twelve of these nineteen companies had annual net sales of less than $10 million. Only one of these respondents used a combination plan for all of its outside salesmen, but one other company used a combination plan for some of its salesmen and a flat amount allowance for the rest. Seven of these companies used mileage allowance plans: three reimbursed in the range of 5¢ to 9¢ per mile, two in the range of 10¢ to lA¢ per mile, and two with graduated mileage allowances of 10¢ per mile for the first 1000 miles and 6¢ to 8¢ per mile for additional mile- age in stipulated brackets. Sixteen of the nineteen respondents furnished enough information about their reimbursement plans to allow calcu- lation of the level of reimbursement at various travel 63 rates. The reimbursement level above estimated operating ex- penses (including insurance cost which could be allocated at a given travel rate) is depicted graphically in Figures l-a, 1-b, and l-c. This reimbursement above estimated operating expenses will be called "replacement reimbursement" hereafter. At a business travel rate of 1000 miles per month the replacement reimbursement of 56% (9 of 16) of the plans would defray two-thirds or more of the cost of vehicle replacement every two years under the assumptions of the model,1 and in 19% (3 of 16) of the plans it would defray all of this cost. Of these responding companies six reported annual net sales of $10 million or more. Two of the six qualified at the two- thirds or more level of replacement cost and none of them qualified at the 100% level of replacement. Of these re- sponding companies ten reported annual net sales of less than $10 million. Seven of the ten qualified at the two-thirds or more level of replacement cost, and three qualified at the 100% level of replacement cost (Figure l-a). At a business travel rate of 1500 miles per month the replacement reimbursement of 63% (10 of 16) of the plans would defray two-thirds or more of the cost of vehicle re: placement every two years under the assumptions of the model, and in 31% (5 of 16) of the plans it would defray all of this cost. Again, at_the two-thirds or more level of defrayment, two of the six respondents that reported 1If the replacement reimbursement of the plan came within $5 per month of the assumed monthly vehicle replace- ment cost, it was counted as qualifying. This was a con- cession to the crudity of the model. 6A Travel Rate 1000 Miles Per Month Company * * . Number 2/3 All Kind of Plan 6007 if 1’ Combination I I 600A I I Mileage I I 5007 I Combination I 5003 I Combination I A006 I Combination I A003 I Mileage l 3007 I Flat Amount I 3002 Mileage——Sca1ed 2016 Combination 201A Mileage 2011 Mileage 2010 Flat Amount and Combination—-Average 2008 I Mileage 2007 Mileage——Scaled 2005 Mileage 1001 Mileage $50 ': $100 $150 Monthly Replacement Reimbursement *Note: .Of the cost of vehicle replacement_every two years. Figure 1a.--Rep1acement reimbursement for the use of sales- man owned cars: 1000 Miles Per Month. 65 Travel Rate 1500 Miles Per Month Company 2/3* All* Kind of Plan Number 4— 4%—— 6007 E . I Combination I I 600A I I Mileage E ' | 5007 \\§\fi I Combination ' I 5003 \\\\\\>4 I Combination A006 5:33 : Combination A003 5;] : Mileage Flat Amount 3007 \\\\\g§Q4 3002 S;E;:;3| Mileage—-Scaled 2016 \\\\§\5\\d Combination | I 201A \<\<\J\J I Mileage I I 2011 S Mileage I | l I 2010 ‘\<\<\J\<\J Flat Amount and I Average Mileage 2008 E I 2007 3:31 I l Mileage--Scaled 2005 III; I Mileage ' I 1001 ' I I Mileage $50 $100 $150 Monthly Replacement Reimbursement *Note: Of the cost of vehicle replacement every two years. Figure lb.-—Replacement reimbursement for the use of sales— man owned cars: 1500 Miles Per Month. 66 Travel Rate 2000 Miles Per Month ICIEEI‘SZ? 2/ 3* “1* l I 6007 . I Combination 600A I I Mileage 5007 : Combination 5003 I Combination A006 : Combination A003 I Mileage 3007 3002 Mileage--Scaled 2016 , Combination 201A Mileage 2011 I Mileage 2010 ' Flat Amount and ' Combination--Average 2008 : Mileage I 2007 I Mileage--Scaled I 2005 I Mileage 1001 ' Mileage $150', $50 '$100 Monthly Replacement Reimbursement *Note: Of the cost of vehicle replacement every year. Figure 1c.--Replacement reimbursement for the use of sales- man owned cars: 2000 Miles Per Month. 67 annual net sales of $10 million or more qualified. Eight of the ten respondents that reported annual net sales of less than $10 million qualified at this level. At the 100% defrayment level, all five qualifying companies were from the group of respondents that reported annual net sales of less than $10 million (Figure l-b). At a business travel rate of 2000 miles per month the replacement reimbursement of 81% (13 of 16) of the plans would defray two-thirds or more of the cost of vehicle re- placement every year under the assumptions of the model, and in AA% (7 of 16) of the plans it would defray all of this cost. At this travel rate four of the six respondents with annual net sales of $10 million or more and nine of the ten respondents with annual net sales of less than $10 million qualified at the two-thirds or more defrayment level. At the 100% defrayment level, all seven qualifying companies were from the group of respondents that reported annual net sales of less than $10 million (Figure l-c). It was estimated when building the model used above that business mileage represented two-thirds of the total mileage that the salesman traveled in his car. This assumption turned out to be non-critical. At the business travel rate of 1000 miles per month, if business mileage had been estimated at three-fourths instead of two-thirds of total mileage driven, only two of the respondents that qualified at the lower defrayment criterion and reported annual net sales of less than $10 million would not have 68 qualified also at the higher (three—quarters or more) re- placement cost defrayment level. At the 1500 and 2000 miles per month business travel rates, no changes in qualification would have occurred. It is clear that the reimbursement practices for these expenses of the smaller respondents (annual net sales of less than $10 million) were more liberal than those of the larger ones. This liberality probably was a function of the mechanics of the different reimbursement plans chosen by the respondents in these respective size cate- gories. Whether or not this difference in liberality be- tween the larger and smaller respondents was a deliberate policy difference was not determined. If the ten respondents that "qualified," as discussed above, at the 1500 miles per month business travel rate are added to the thirty—seven respondents that furnished only company cars to their outside salesmen, nearly four out of five responding companies, in effect, furnished cars to their outside salesmen for personal use for which the sales- men paid only a nominal proportion of the replacement cost. Furthermore, if the seven respondents that reported partial use of company cars but reported reimbursement plans that did not "qualify" are added, nine out of ten respondents, in effect, furnished such cars to at least some of their outside salesmen. 69 Summary--Travel Expenses Travel expenses incurred by outside salesmen in this industry were almost entirely automobile travel expenses. These expenses could be categorized as direct operating expenses and vehicle replacement expense. Only two of the sixty responding companies paid none of the direct operating expenses incurred by their sales— men because of automobile travel in their territories. One other respondent reported that some salesmen paid their own travel expenses and some were reimbursed for automobile travel expenses at a level that exceeded direct operating expenses. All three of these respondents were commission plan companies. Only four responding companies reported compensating their outside salesmen with commission only. The fourth commission plan company paid direct oper- ating expenses of automobile travel for their salesmen or reimbursed them for such expenses. The remaining fifty—six companies, which included a salary component in their com— pensation plans for outside salesmen, paid direct operating expenses of automobile travel for their salesmen or reim- bursed them for such expenses. About three out of five responding companies furnished company cars to all of their outside salesmen, i.e., paid the cost of vehicle replacement directly. Almost four out of five respondents furnished company cars to at least some of their outside salesmen, including one of the commission plan companies. The incidence of the practice 70 of furnishing company cars increased as the size of the responding company increased, as measured by annual net sales. Only one of eighteen companies that reported annual net sales of $20 million or more did not furnish company cars to any of their outside salesmen. Almost three out of four responding companies that furnished company cars to their outside salesmen leased the cars. Here, too, the incidence of the practice of leasing cars tended to increase as the size of the re- sponding company increased. Only three of the seventeen responding companies which furnished company cars to their outside salesmen and reported annual net sales of $20 million or more furnished only company owned cars. Of the twenty-three respondents which reported that at least some of their outside salesmen drove their own cars, nineteen were companies which included a salary component in their compensation plans for these salesmen. Of these nineteen respondents, sixteen furnished sufficiently de- tailed information to permit calculation of the automobile expense reimbursement allowances that would be paid to their outside salesmen for selected business travel rates. These data are shown graphically in Figures l—a, l-b, and 1-0. More than half of these reimbursement plans resulted in allowances that compensated the salesmen for estimated direct operating expenses plus at least two-thirds of the 71 estimated vehicle replacement cost. All but two of these reimbursement plans that qualified at the two-thirds or more defrayment level would also have qualified if the criterion had been three-quarters of the estimated vehicle replacement cost. The general practice among the respondents which reported furnishing company cars to their outside salesmen was to allow personal use of the car, but to require reim- bursement to the company for this personal use to some ex- tent. This reimbursement requirement varied from nominal "honor systems" requiring the reporting of and payment for such use in an informal manner to formal plans requiring the payment of probably 15% to 25% of the replacement or leasing cost of the vehicle. If it is recognized that sufficiently liberal reim- bursement plans for the use of salesman-owned cars produce the same financial result to the salesman as furnishing him with a company car, it is possible to estimate that the salesmen of probably four out of five of the responding companies drove cars for personal travel for which they paid a relatively nominal amount of the replacement cost. Some of the salesmen of nine out of ten of the responding companies probably drove cars for which this was true. It is unlikely that practices among the companies in this industry with regard to travel expenses for outside salesmen differed in effectiveness during the period of this study enough to provide the differential advantage 72 that might operate to attract a disprOportionate number of the more proficient salesmen to a particular company. Other Travel Expenses.--With the exception of the two commission plan companies which did not reimburse their out- side salesmen for travel expenses which they incurred, all of the responding companies reported that all other travel expenses such as railroad and airplane fares, lodging, meals, tips, laundry charges, etc. were paid by the com- pany. However, these expenses were incurred infrequently by these salesmen. Customer Good Will Expenses Entertainment Expenses.--Expenses incurred by outside salesmen.irIthe:meta1s service center industry for lunches, dinners, and incidental entertainment were found to be sub- jected to close scrutiny and control by management, but the large majority of the responding companies reported that such scrutiny and control was pg post facto. Of the responding companies, 72% (A3 of 60) reported that entertainment expenditures were reviewed, usually on a monthly basis, by management after they had been made. The appropriateness of an expenditure was judged and the salesmen was advised to modify his practices of customer entertainment, if such action seemed to management to be desirable. Sometimes general rules were laid down, such as: "lunches, no restriction; dinner and evening enter- tainment, prior approval" or "prior approval required for expenditures over $25." 73 Budgets for entertainment expenses at the salesman or territorial level were reported by only 25% (15 of 60) of the responding companies. Flat dollar amount budgets were reported by eleven of these fifteen respondents, two re— spondents reported that the budget was expressed as a per- centage of dollar sales volume generated in each territory, and two respondents reported that the budget was expressed as a percentage of gross profit generated in each territory. Two of the four commission plan respondents reported that their outside salesmen paid their own entertainment expenses and were not reimbursed. The remaining two com— mission plan respondents paid for entertainment expenses incurred by their outside salesmen or reimbursed them for such expenditures. One of these companies was included in the group of responding companies which exercised only pp post facto control over such expenditures. The other was included among those respondents that expressed the budget for entertainment expenses as a percentage of dollar sales volume. One respondent that compensated its outside salesmen on a salary plus commission plus bonus basis and assigned each salesman a flat dollar amount budget reported that, when a salesman's expenditures for entertainment exceeded the budget for these expenses allowed him, the excess was deducted from his commission. 7A Fixed Compensation Salary Component Plans Of the responding companies, 93% (56 of 60) included a salary component in their compensation plans for their outside salesmen. Only 12% (7 of 60) of the respondents compensated their outside salesmen entirely by salary. No significant difference in this practice among companies in the different size categories was apparent (see Table 6). The remaining 81% (A9 of 60) of the responding companies reported using a salary component in their compensation plans for these salesmen, but also included a bonus com- ponent, a commission component, or both in their plans. These plans are analyzed under Incentive Compensation later in this chapter. Draw Accounts Of the four responding companies that did not include a salary component in their compensation plans for their outside salesmen, two reported that they allowed these salesmen to draw against future commissions up to stipulated monthly amounts. However, both of these respondents also reported that any debit balance that existed at the close of a fiscal year, i.e., an overdraft against commissions, was "forgiven." In such cases the term "draw account" is a synonym for "salary." Both of these respondents reported that occasions for "forgiveness" were very infrequent. The other two commission plan respondents compensated their 75 outside salesmen with "straight commission" plans and did not allow these salesmen to draw against future commissions. Incentive Compensation Of the reSponding companies, 88% (53 of 60) reported an incentive component in their compensation plans for out— side salesmen, including the four commission plan re— spondents. The incentive components that these respondents used were classified as either commission plans or bonus plans. Compensation plans using both commission and bonus com- ponents were reported by 20% (12 of 60) of the responding companies. The primary characteristic that was the basis for the categorization was the directness with which the incentive was associated with an objective measure of the performance of an outside salesman. These measures of performance were dollar or unit sales volume and dollar profit, as variously defined by the individual company, that resulted from that sales volume. The several profit measures that were used will be discussed under Commission Plans. Incentive com— ponents of these outside salesman compensation plans which were classified as commission plans were more directly associated with these objective measures of performance than were those that were classified as bonus plans. Many of the latter plans were predicated upon performance criteria for the salesmen that required subjective management 76 evaluation. This characteristic was almost entirely ab- sent from the commission plans. An incentive component of a compensation plan was classified as a commission plan if the incentive: l. was determined by applying a percentage rate (or a proportion), or a schedule thereof, directly to an objective measure of the salesman's perfor- mance, such as dollar sales volume or dollar profit volume, or was determined by assigning a money value to "points" accumulated according to a schedule of point values designed to differentiate among pro- ducts or product groups, usually as to their relative profitability, or was determined by applying a percentage rate (or a proportion), or a schedule thereof, to a calcu- lated measure of performance arrived at by differentially weighting actual sales, usually as to their relative profitability, or was determined by applying a schedule of dollar incentive unit values to sales expressed in physical units, such as tons. An incentive component of a compensation plan was classified as a bonus plan if the incentive payment: 1. was determined by allocating to the individual salesman a share of a pool, the size of which was 77 set by a formula for sharing profit (either in- come statement net profit or gross profit) with the outside salesmen as a group, or by manage- ment flat, or 2. was determined by applying a percentage rate, or a schedule of rates, to the individual salesman's salary or commissions according to a schedule of stipulated levels of attainment of a gross profit quota, or 3. was determined by applying a percentage rate, or a schedule of rates, to the individual salesman's salary or commissions according to the number of individual product or product group quotas at- tained, i.e., a product-mix criterion. Most classification schemes are subject to the same general criticism--that many of the specific item assign- ments to a particular category are more or less arbitrary. This classification scheme is no exception. The classifi- cation of some plans were borderline decisions. Both the point system and the dollar sales weighting system introduced an element of flexibility into commission incentives that will be discussed later. In general, this element of flexibility enabled company management to depart from the rigorous framework that the use of the actual differential profitability factors of products or product groups imposed upon the incentive plan. 78 The incidence of the use of the different kinds of compensation plans for outside salesmen is summarized in Table 6. In general, where commission plans were used in this industry to provide incentive in the compensation plans for outside salesmen, the incentive payment, expressed as a proportion of total cash compensation, was higher than where bonus plans were used. Bonus Plans The most commonly used compensation plan for outside salesmen among the responding companies was the salary plus bonus plan. Of the respondents, 35% (21 of 60) reported using this plan. The incidence of salary plus bonus compensation plans decreased as company size increased, as measured by annual net sales. Of the responding companies which had annual net sales of $20 million or more, only 22% (A of 18) of the respondents reported using salary plus bonus plans to compensate out- side salesmen. However, among the responding companies which had annual net sales of less than $5 million, 52% (ll of 21) of the respondents reported using this plan (Table 6). 0f the responding companies, 55% (33 of 60) used a bonus component in their compensation plans for outside salesmen, when those respondents which reported using both 79 .wnfionson mo owSOoon OooH on new p02 has manpoe "meoz OO O OO OH OO HH OO OO HOOoe OO O OO O OO O NO OH OOOHN_OoOooHnOIanonn HOH O OOH OH OOH OH OOH OO Hoeoe ON MI ON MI O OI NH OI nonOO OO O OO O OO OH OO OH Oofin nooeownnnz ON N OO O OO O OO HH wanmnm anonN “mucoCOQEoo manom OO O OO O OO O OO OH OHnonn no OOHOO O pmnfie no coammHEEoo OO O om O OO O mm OH copnoOnOIpHmonm OOH HH OOH NH OOH O OOH NO Hanoe OO OI ON OI OO OI HO OO onsopoz eHnonN eO OO O OO O OO O OO NN OOHOO no O no "meoQOQEoo noammOEEoo OOH OH OOH HN OOH HN HOH OO Hoeoe O OI OH OI O OI O OI OHeO COHOOHEEoO OH O OH O ON O ON NH neomIOanOO OO O ON O OH O ON OH OOHOOHEEOOIOnOHOO NN O ON O NO HH OO HN nanomIOnoHom OH O OH O O H NH O OHno OnOHOO & .moo R .moo R .moo O .woo onoz no coHHHHz ONO ooHHHHz OO OOHenoaoO ooHHHHz ONO Ooz nsm none omoH OnHOnodOom coHHHHz OO HHO mmfimm pmz HGSCCd. HQOH .Anosnoaom oefimusov OOOH .Onpmsene nopnoo ooa>nom Hanoi on» GO mconpoe COOpmmnoQEooIo.o mnmee 80 a bonus component and a commission component in their plans were included. It has been pointed out that the bonus plans were less directly associated with objective measures of the salesman's performance than were the commission plans. These bonus plans could be further classified according to the methods used to determine the individual salesman's bonus. Almost nine out of ten (29 of 33) of these respondents first determined a group bonus--the total amount to be paid to all of the outside salesmen. The individual salesman's bonus was then determined by one of several allocation methods. Of the respondents that reported bonus plans, 33% (ll of 33) determined the group bonus according to a profit sharing formula. In some cases this bonus was part of a formal profit-sharing pension plan--part of the profit share for the outside salesmen was paid into the pension trust fund and part into this bonus pool. In other cases the pool was created by an informal allocation of a portion of either total company gross profit or income statement net profit before taxes. Another 55% (18 of 33) of these respondents determined the group bonus pool by management fiat. The remaining 12% (A of 33) of these respondents did not use the pool arrangement. Two of them applied a sche- dule of percentage rates to the salesman's salary according 81 to a schedule of stipulated levels of attainment of a gross profit quota to determine the individual salesman's bonus. The other two used product—mix formulae to determine the individual salesman's bonus. Of the twenty-nine respondents that used a pool arrangement in their bonus plans, nine of them allocated to the individual salesman a share of the pool according to formulae based on employment factors-—principally salary and/or years of service, ten of them allocated shares of the pool according to a subjective management evaluation of the salesman's performance, and seven of them used a combination of these methods to allocate individual shares. The remaining three of these respondents allocated shares to individuals according to the profitability of their territories. Gross profit was used in two cases and gross profit less territorial sales expenses in the other case. Of the thirty-three bonus incentive plans reported by the responding companies, seventeen were related in some way to a profitability measure. However, of the eleven profit- sharing plans, only one was allocated on the basis of a profitability measure. Two of the management fiat plans were allocated on the basis of a profitability measure. Of the four plans which provided for direct determination of the individual salesman's bonus, two were based on gross profit but the incentive was expressed as a percentage of salary. The remaining two, although gross profit was 82 involved, determined the bonus on the basis of attainment of several product or product group quotas, i.e., product- mix. Commission Plans Of the responding companies, 27% (16 of 60) reported the use of a salary plus commission plan for compensating their outside salesmen. The incidence of these plans increased as company size increased, as measured by annual net sales (Table 6). Of the respondents which had annual net sales of $20 million or more, AA% (8 of 18) reported the use of this kind of plan for compensating their outside salesmen. However, among the respondents which had annual net sales of less than $5 million, only lA% (3 of 21) reported the use of this kind of plan. If the 20% (12 of 60) of the responding companies which reported the use of a salary plus commission plus bonus plan and the 7% (A of 60) commission only companies are included, 53% (32 of 60) of the respondents reported the use of a commission component in their compensation plans for their outside salesmen. The incidence of a commission component in compen— sation plans for outside salesmen did not change signifi- cantly with change in company size, as measured by annual net sales. The smaller companies used salary plus com- mission plus bonus plans somewhat more frequently than 83 the larger companies did and this tendency offset the re- ported tendency for larger companies to use salary plus commission plans. As was noted in the previous section on Bonus Plans, the smaller companies were significantly more likely to include a bonus component in their compensation plans for these salesmen than were the larger companies. Of the thirty-two responding companies that reported a commission component in their compensation plans for these salesmen, two out of three (22 of 32) reported that the commission component of their plans was based on dollar or unit sales. However, nine of these twenty-two plans included in the determination of the incentives payment in some manner a differential product or product group profit— ability factor. The simplest approach used to introduce differential product or product group profitability into the plan was to vary the commission rate to reflect comparative profitability. Of these twenty-two respondents which reported dollar or unit sales based commission plans, twelve used varying com- mission rates. Seven of them reported that the variation was based on differential product or product group profit- ability. The remaining five did not identify the basis for the variation in commission rate. A similar approach assigned different "point" values to different product or product groups on the basis of comparative profitability. The incentive payment made to the individual salesman was then calculated by assigning 8A a money value to his accumulated point total at a uniform rate per point. A third approach used a uniform commission rate but applied this rate to a hypothetical sales volume. This hypothetical measure of performance was calculated by differentially weighting the actual dollar sales in accordance with a schedule of weights, for example from 0.8 to 1.2, depending on the profitability level of the product or product group category sold. Ten of the thirty-two respondents that reported using commission components in their compensation plans for out- side salesmen based their commission incentive directly upon some measure of profitability. The most commonly used measure was either gross margin (expressed in dollars) of a product or product group; or gross profit, which was de- fined as price (gross revenue) minus cost of material in- cluding freight-in. Although some of these respondents re- ported that their plans were based on product or product group profitability, the procedure used to arrive at the individual salesman's incentive payment involved the sum- mation of the profit generated by all of the individual sales made in his territory and the application of a per— centage rate, or a proportion, or a schedule thereof, to this total. This kind of incentive plan probably should be described as a territorial profitability plan. Involved in the operation of this kind of plan were the concepts of product profitability, order size profitability, and 85 customer profitability. Two of these respondents reported that the plans they used were of this kind, but the profit- ability measure used was net profitability. The net profit- ability measure involved allocating fixed expenses either to territories or to products or to product groups. The incidence of the use of a profitability measure directly in commission incentive plans did not appear to vary significantly with variation in company size, as measured by annual net sales. The respondents which reported the use of a commission component in their compensation plans for outside salesmen were about equally divided in their preference for paying commission beginning with the first dollar of sales or profit versus paying commission only on the excess above a dollar sales or profit quota. Seventeen of these re- spondents reported the former practice and fifteen reported the latter, respectively. The largest responding companies appeared to show a tendency to use quotas more frequently than the smaller ones did, but the sub-sample sizes were very small and the significance of this tendency is subject to considerable doubt. Where quotas were used in these commission incentive plans the interviews held with company executives disclosed that the quotas frequently turned out to be the level of sales or profit that would generate, when the proper com- mission rate was applied, an amount of commission equal to the salesman's salary. Sometimes this characteristic of 86 the plan was clearly indicated in the written description of the plan that was given to the salesman, and sometimes it was not. Of the thirty-two commission incentive plans re- ported by the responding companies, 59% (19 of 32) were more or less directly based on comparative product or pro- duct group profitability. The incidence of this charac— teristic of these plans did not appear to vary with vari- ation in company size, as measured by annual net sales. Summary of Incentive Compensation Only 12% (7 of 60) of the responding companies used straight salary to compensate their outside salesmen. Thus, nearly nine out of ten of the respondents used an incentive component (commission, bonus, or both) in their compen- sation plans for these salesmen. The smaller companies were significantly more likely to use salary plus bonus plans as incentives than were the larger companies. The larger companies tended to use salary plus com- mission plans as incentives more frequently than did the smaller compnaies. Although various approaches to incentive compen- sation were used by these respondents, the commission plans used were more directly related to objective measures of salesman performance, such as dollar sales and dollar profit generated by sales, than were the bonus plans. 87 One-half of the respondent companies reported out- side salesman compensation plans that were profit-oriented to some degree. Incidence of this characteristic did not vary significantly with company size. CHAPTER A PATTERNS OF COMPENSATION OF INSIDE SALESMEN IN THE STEEL SERVICE CENTER INDUSTRY In this industry the primary demand creating force is the outside salesman. He seeks out potential buyers, negotiates the sale, and services the customer after the purchase is delivered. The inside (or telephone) sales- man usually accepts the actual order, arranges for pro- curing the necessary material to fill the order, and follows the order through the warehouse until it is de- livered to the customer. In theory the inside salesman and the outside sales— man work as a team. The interviews that were held with executives of the companies which comprised the sample1 for this study revealed an obstacle which prevented the attain- ment of this theoretically desirable cooperation. Only three of the responding companies reported that inside salesmen were assigned territories coinciding with those serviced by one or more outside salesman. A great many telephone calls are handled by the inside salesman 1Executives from fifty-three of the sixty companies which comprised the sample were interviewed. 88 89 and most of the executives interviewed were skeptical of the practicality of any system designed to channel these calls to specific inside salesmen on a territorial basis. Many reported trials of such systems and subsequent abandonment as unworkable. Because of the difficulty, if not impossibility, of assigning territorial responsibility to inside salesmen, individual incentive compensation for these salesmen was difficult to design so that it would be equitable. It is not surprising, then, to find the great majority of in- centive plans for inside salesmen in this industry were pooling arrangements of commission or bonus from which the individual was allotted a share on some relatively sub- jective basis or by means of a formula based on factors of employment such as salary and/or years of service. Fringe Benefits All sixty responding companies reported that inside salesmen were offered the same insurance and pension bene- fits as outside salesmen. Because these benefits were usually related to income, the level of benefits for in- side salesmen was not necessarily the same as for outside salesmen. However, company participation in the cost of these benefits followed the same practice as that for out— side salesmen in the same company. 90 Expenses In-person contact with customers was the responsi- bility of the outside salesmen of a company in this industry. Consequently, the outside salesmen incurred travel and customer good will expenses, such as entertainment expense, while inside salesmen customarily did not. If and when an inside salesman did incur these expenses they were paid by his company. Incentive Components The great majority of the responding companies which reported the use of incentive components in their compen- sation plans for inside salesmen used bonus plans. Of the responding companies, 53% (32 of 60) reported the use of a bonus component in their compensation plans for these salesmen, including two companies that reported salary plus commission plus bonus arrangements. A bonus plan for incentive compensation for these salesmen was reported more frequently by the smaller companies than by the larger ones (Table 7). Of those respondents which had annual net sales of $20 million or more, 33% (6 of 18) reported using a bonus com- ponent in their compensation plans for inside salesmen. Of those respondents which had annual net sales of at least $5 million but less than $20 million, A8% (10 of 21) reported using a bonus component in their compensation plans for these salesmen. .OOHHHoOOHnonN no: ocn .oEOHo> O .mcfiocson O0 omsmoon mooH 0» now won Owe mHmpoeo .moCOnIIOLOHOOO no coHumcHnEoo n .coEmoOmm NO manooneanmm .coEmonm OH OOno OanmelmchEoo ocom OOH O OOH OH OOH OH OOH NO Hmooe Ozoz OH H Ozoz O H nocHH noossz OH H mzoz Ozoz O H OnOHOO oeooo no HnooHnHocH ozoz ON N Ozoz O N osHocoocH mo OH H OH H Ozoz O N Oposo OOHOO O OO N OO O OO O HO OH OOHO ocoeommcnz OO N ON N OO O HO OH OcHnOcm 6Hnona pcoeumcmnn< Ooom "mpnocooeoo mscom O O N O Honoe OzozI mzoz I O O OOHnonO OnoOHnnoe HOOOH>HOOH m” Ozoz H Ozoz H OHOO noEoOOOo 2oz N H Ozoz O OHnonO OOono co O H O m moan: no O no ucoEowwmnn< Ooom “muconoqeoo :onmOEEoo HOH OH HOH HN OOH HN OOH OO Hmooe Ozoz Ozoz Ozoz Ozoz OHco ooHOOHEEoo O H O H Ozc: O N OOOOIOnOHOO HH N OH N OH N OH O coHOOHEEoOIOnOHOO ON O OO O OO OH OO OO OncoOIOnoHom OOO OH OO O OH O OO NN OHco OnOHOO n.“ .mOU R .mOO w moo R .moo one: no :oHHHHz ONO coHHHOz OO oochasoo coHHHHz ONO ooz OOO sane OOon OcHocooOon coHHHH: OO HH< moamm poz Hmscc< zOofi .AcoEmoOmm opfimnev :OmO .OnuwsocH noncoo o0O>nom Omuoz on» CH moonpoE coapmmcoQEOOII.O mqmH osono OOO.OH on OOHIHHH asono MOO.ON on OONIHH osono mOHom owmnoeo O0.00 on OOOIH ozonoo OH ON O O O O H O O O momHn HHOIIHmooe M! d! M m M d d d m d Onoamm N HH H N O O H H O N OsooOIOnOHOO O OH N O N O O O O N coHOOHEEoO HoOoe O OI O O O O O O O O meson IGOOmmOEEooIenoOmm N O H N H H O H O O ooHOOHssoOIOnOHOO H O O O H H O N O O OHeo ooHOOOaaoo .moo .moo .moo .moo .moo .moo .moo .moo .moo .moo .o.n .o.n .o.n .o.N .o.N .o.N .o.N .o.n o.o.N .o.N #02 p02 p02 902 902 QMHm wo mth Hopoe >H asono HHH asonm HO Qsonw H onnw o.asonm Opfiafinmpfimonm oco anQ QOHOOOnonoo noEmoOmm oofimuso mo one» on mnaonoooo menoonommon mo soapsnfinmeQII.m mqm< I wOOupwso pmzoq ORO.OO 0» OO.O u OHOO mwmgm>< I OHHOOOOO OHOOOz pmzoq ”OO.HN on O0.0H n OHom mwmgm>O I OHHOOOOO mHOOHz LOOOO OOO.Om on OO.NN I OHom mmmpm>O I OHprmsa OOOOOO OH ON O O O O O O O O Hmpoe OI OI O O O O O O O O :33 N HH H N O m H O O m mssomIOpmHmm O OH H O N N H O O O cOHmmHseOO Hmpoe O OI O .m. O O O .N. O O 350m IQOOmmOEEooImmewm N O O H H N H O O H OOHOOHEEOOIOOOHOO H O O O H O O H O N OHOO OOHOOHEEOO .moo .moo .moo .moo .moo .moo .moo .moo .moo .moo 000m 000m .O'm,000m 000m OOom 000m 000m DOOOm 000m p02 Ooz ‘ poz _Ooz poz cmHm Oo maze OHHOOOOO OHHOOOOO OHHOOOOO OHHOQOOO Hmpoe pmzoq OHOOHz OHOOOE meOO nmzoq Amman m.mOOpnmsv an mpOOOnmpOmopa cam cmOQ :oOummchSoo cmEmmOmm mUOmuso mo omzp on chvnooom mpcmccommmp mo GOOpsnthmOQII.OO mOmOB 112 The outside salesman compensation plans of the report- ing companies were categorized as "profit-oriented" or "not profit-oriented." The profit-oriented category of plans included all plans where a commission or a bonus, or both, were based upon product, product line, or territorial profitability. Also included were the plans where district or company profits were shared with the salesman in some organized fashion, of which the salesman was aware before the fact. The not profit—oriented category of plans in— cluded salary only plans and commission and bonus plans which were based upon factors other than profitability. These included most dollar sales based commission plans and bonus plans based upon factors such as product-mix and new customer activity. Some dollar sales based commission and bonus plans had a profitability weighting factor incorpor- ated into them. These were included in the profit-oriented category. It was unfortunate that all six of the companies in the "under $20 million" 1964 annual net sales size class that did not report data which would permit calculation of ROIC compensated their outside salesmen with not profit-oriented plans. The result was a disproportionate reduction in the "not profit-oriented plan" cell (see Table 8). Thus, only ten of the thirty-six respondents in this size class for which ROIC data was available used not profit-oriented plans to compensate their outside salesmen. The very small entry 113 in this cell reduced the reliability of any apparent pattern of difference in profitability that might appear. Only four of the thirty-six (11%) reporting com- panies in this size class had average ROIC that fell into the Group I category (see Table 9). All four used profit- oriented compensation plans for their outside salesmen. Seven (19%) of these respondents reached Group II profitability as measured by average ROIC. To compensate their outside salesmen, six of these respondents used profit-oriented plans and one used a plan that was not profit-oriented. Thus only one of the ten respondent companies that compensated their outside salesmen with a plan that was not profit—oriented reached a profitability level as measured by average ROIC of 20% or more. Average ROIC for this com- pany was-20.7% and it showed a very substantial increase in ROIC for 1965 over l96u (1“.3% to 27.1%). This company used a salary bonus plan where the bonus pool was deter- mined by management decision and allotted to each salesman on the basis of management Judgment. This company reported a typical ratio of cash incentive compensation to total cash compensation for those companies using salary-bonus plans (16%) but the ratio of total cash compensation to net sales was the second highest of the salary—bonus plans (3.28%). This company had 1964 annual net sales of less than $5 million. 114 Thirteen (36%) of these respondents fell into Group III profitability as measured by average ROIC. Nine of them used profit-oriented plans and four used plans not profit-oriented to compensate their outside salesmen. Twelve (33%) of these respondents fell into Group IV profitability as measured by average ROIC. Seven of them used profit-oriented plans and five used plans not profit-oriented to compensate their outside salesmen. There was a company size effect apparent in the profitability data. Of the eighteen reporting companies with 1964 annual net sales of "at least $5 million but less than $20 million," none reached Group I profitability as measured by average ROIC and only three (17%) reached Group II profitability. Thus fifteen (83%) of the reporting com- panies in this size category were below 20% average ROIC as compared with only ten of the eighteen (56%) reporting com- panies with 1964 annual net sales of "less than $5 million." Four (22%) of the eighteen reporting companies in the latter size category reached Group I profitability and four (22%) reached Group II profitability. Only one of the four in the latter company size category that reached Group II profitability used a plan to compensate their outside salesmen that was not profit-oriented. None of the—three in the former company size category that reached Group II profitability used such a plan to compensate their outside salesmen. 115 The thirty—six companies with 1964 annual net sales of "less than $20 million" that reported sufficient data to calculate ROIC were divided into quartiles and analyzed to determine use or non-use of a profit-oriented plan to com— pensate outside salesmen as related to their quartile posi- tion (see Table 10). Of the nine companies in the upper quartile (average ROIC 22.0% to 39.8%), none used a not profit-oriented compensation plan. Of the nine companies in the upper-middle quartile (average ROIC 15.7% to 21.6%), three used not profit-oriented compensation plans. Of the remaining seven reporting companies in this company size category that used compensation plans not profit-oriented, four were in the lower—middle quartile (average ROIC 8.7% to 14.6%) and three were in the lower quartile (average ROIC loss 1% to plus 8.7%). Thus, only three of the ten companies using compensation plans not profit-oriented were above the median profitability (the average of the average ROIC values for the 18th and 19th ranked companies--15.2%) of all the reporting companies in this company size category. Finally, the median profitability as measured by average 1964-1965 ROIC of the twenty-six reporting companies which had 1964 annual net sales of "less than $20 million" and used profit-oriented plans to compensate their outside salesmen was 16.9%. The median profitability (based on the same measure of profitability) of the ten companies which had 1964 annual net sales of "less than $20 million" and 116 used compensation plans that were not profit-oriented was 10.8%. The company size effect in the profitability data was again apparent when the data of the eighteen reporting companies with 1964 annual net sales of "less than $5 million" and of the eighteen reporting companies with 1964 annual net sales of "at least $5 million but less than $20 million" were analyzed separately. The comparable median average ROIC value for the thirteen in the former size category that used profit-oriented compensation plans was 20.1% as compared with a median average ROIC value for the five that did not of 12.3%. In the latter size category the median average ROIC values were 13.9% and 8.7% re- spectively. Profitability Related to Type of Compensation Plan The profitability data for those reporting companies that had 1964 annual net sales of "less than $20 million" were analyzed to investigate the relationship between the type of compensation plan a company used and its relative profitability (as measured by average ROIC for 1964 and 1965) when compared with companies using other types of compensation plans for outside salesmen. Commission P1ans.-—Nineteen of the thirty-six report- ing companies in this size category used a commission com- ponent in their outside salesman compensation plans. Of these nineteen companies, ten were above the median profit— ability level of the reporting companies in this size 117 category as measured by average ROIC and nine were below that median. The median profitability level as measured by average ROIC of the nineteen reporting companies in this size category that used commission component plans was 16.3% as compared with the median average ROIC value for all of the reporting companies in this size category of 15.2%. This was not a significant difference. The distribution of these nineteen companies among the profitability groups, Group I through Group IV as de- fined earlier in this chapter, was not significantly different from the distribution of all the reporting com- panies in this size category (see Table 11). Responding companies were asked to provide data from which the ratio of cash incentive compensation to total cash compensation paid to all their outside salesmen in the year 1964 could be calculated. Of the nineteen reporting com- panies in this size category that used outside salesman compensation plans that included a commission component, eighteen furnished such data. Of these eighteen, four re- ported this ratio to be 100% (commission only plans), seven reported this ratio to be in the range 40% to 70%, four reported this ratio to be in the range 20% to 30%, and three reported this ratio to be less than 10%. Three of the four commission plan companies had average ROIC values above the median for all reporting com- panies in this size category. All three used profit- oriented compensation plans. One of the four commission 118 cOOOOOE 0mm can» mmoO mo mmOmm no: Owsccw OOOO Onowoumo mNOm 2O mOOGMQEoo mo .chucsop mo omsmoon OOOO op OMpOp no: has mOOMpcoommm .mpmc pOonp coupoaon wasp o .O0.0 on Ammmqv OH I >H OOOOO mOOOH 0» OOH I HOH OsopO mOOON Op OON I HH OsopO MOHOO mmmpm>m O0.0m 0» OOm I H OOOOOO OOH Om mm NH Om OH OH O HH O OmcmHm HHO OOH O OO N OO N O O O O OHOO OpmHmm OO OH mN O OO O OH N OH N mssom msHm Oanmm OOH OH OO O ON O ON O HH N mcmHO QOHOOHEEOOIHOOOO OO O OO O HH H NN N NN N mscom OOHO coOmmOEEoo msOm Omemm OOH O OO O mm N OH H O O scammfleaoo OOHO OamHmm OOH O O O OO N OO N O O OHOO cOOOOHEEOO O .moo O .moo .O .moo O .moo O .moo Odpoe >H ozonw HHH Q3090 HH asomw H odopw cmOm mo maze .coEmmme mUOmpso mom cmOQ GOOpMmGOQEoo mo oak» an ooOMOmmmOo moflcmqsoo pcovcommom mo amasopm mpOOOomuOmonm wcoem coOpsnOpmeU mseII.OO mqmhmm Hmmumz EOQM mgm mme .H .0 .m .m mflBm .mpmo opmpm an coOpsnOHumOv poucoo Eomm Ooxnozon oaoz.mpmu ommce .OO .d .OOOO .om< conH =.mnopcoo oOO>nmm mOmpmz mo mamcmo= EoHO mam mpmw om¢ copH one m .COOmom mmpmpm OOOOomm I coOmmm .m .m ”COOmmm ampmpm cOmpcsoz Oxoom I COOwom .2 .m mcomem mopmpm spozpsom I COOwom .m .m OGOOwom m6pmpm Omnpcoo I comem .m .o OQOOwom mopmpm moxmq pampo I :omem .m .4 .0 OCOOwom mmpmpm OOOCOOHO I COOwom .m .O .AxOccmmmw mng mo Ono on» an awe oomv Ono; OMOOmeumpm muO no OOm :O Homm on» an wow: omo£p mum mCOOwop OOannmomw ommseO OOO O.NN 0.0 m.om 0.00 0.00 0.00 pcmopom OON mO mO mm mm O: OO mpmpcoo oOQEmm OQO 0.00 0.0 o.om N.om 0.00 0.00 pcmonmm OmO OOO Om OOO OOO OOO mmO mnmpcoo m.H.o.m.m OOO 0.00 O.N 0.00 m.ON N.OO N.mm ucoomom mowO OON m: mom NmO Omm mm: myoucmo Nom< quH proe comem COmem GOOwom GOOwom coOwom coOwom Om Om ”z .m Om 0m Om 00 Om OfiH Om Om O< HOQOHOOO .H .O .m .m .OOOO .mnoucoo ooO>mom OmpoE mo COOpsnOHmeo canampmoooII.OI¢ mqm HOW USED: _______ CONTINUOUS NETROD 1.- _ -_ _ .. - 0F COMPENSATION (on) P - ______ I SPECIAL PRONOTIONS j. _ _ -- _ _ .. ONLI RON CALCULATED: ______ SALES ABOVE - .. - .. .. - A UOTA I, “£0311 ON ALL SALES TRON j. _______ FIRST 8 OR # RATE STRUCTURE: _ _ RATE UNIFORM ALL ‘ _ _ , mms&wwm 0R i L _(_.).f RATE VARIES BY _________ VOLUME (S OR-#) g (on) i v IE ‘Y I- RATE AR SB __- __ "--- T ITEM RATES RISE AS |._-_...... VOLUME INCREASES (on) _ 1 _____ RATES FALL AS J____..__ VOLUME INCREASES (0R) ‘ RATES DON'T CHANGE |,__..--- VITR VOLUNE RESTRICTIONS: ' , _ __ PLAN HAS CEILING ON _ _ __ COMMISSION INCOME Please Check The Details That Describe Your Plan Beat PAGE 4 r'"------ “'1 : INCENTIVES : L -_ .. _ .. T ..... .J I J OTHER INCENTIVES BONUSES CONTEST OTHER * PRIZES ‘ j * NOTE: Please explain "other". ELIGIBILITY REQUIREMENTS BASED ON : . ----- -INDI VI DUAL PEREORMANd _...-.... --- - - CROUP PERPORNANCEJ ALLOCATION OF PAYOFF BASED ON : _ _ _ _ EMPLOYMENT FACTORS " (SENIORITY,INCOME,ETC] DIRECT CONTRIBUTION TO PROFIT (on) -—--------—-1 _. _ -— — q OTHER FACTORS * PAYMENT IS IN : _____ CASE _____ STOCK ._ _..—-—4 OTHER ' Please Check Those Components That Are In Your Plan PAGE 5 [ EXPENSES J l TRAVEL ] [ENTERTAINMENT] [ OTHER * ] OTHER [‘"TG"°BILEJ I TRAVEL l CONTROL BY ~ I COMPANY _Q‘”§3 PERCENTAGE OF SALES COMPANY SALEMAN'S - OR FLAT 3 ANOUNT CAR CAR BY TERRITORY * * MEALS _ LODGING OTHER CONTROL’ (ACCOUNTABILITY) FARES - OTHER * i e CAR NOTE. OPERATION Please explain "other”. i ALLOWANCE ----- -- -- - FLAT AMOUNT I‘MOUNT‘ ............ LESS THAN 5¢ per MILE L------I -....-- 5¢ to 9¢ per MILE }. ------ -{ ----- 10¢ to 14¢ Per MILE |_- _ _ _ _. .. _. ..... OTHER ,“Please specify: .----- —- --— -- CORPANY OWNED CARS F ........... LEASED CARS Please Check The Details That Describe Your Plan Best PAGE 6. Description of compensation plan for INSIDE SALESMEN: (Please check one of the choices below which describes your plan or explain under "other".) a. Salary or wages only b. Salary plus commission (l) on sales volume (2) on item profitability c. Salary plus bonus Briefly describe basis on which bonus is awarded: dc. Other (please explain) e. If FRINGE BENEFITS for inside salesmen differ from those described in the CLASSIFIER for field salesmen, please describe those available to inside men: Number of service centers (locations) company operates Number of field (outside) salesmen cempany employs Number of telephone (inside) salesmen company employs Number of field (outside) salesmen included under the compensation plan described in the CLASSIFIER PAGE 7 .__A». -.- *a . . i , l ‘ . .t ‘ ' r e L4 I ' ' I . _ - a..- _ "" r -- . 7-. ‘ . V vs... .. l . . '- c\ ‘ I s .-I l ‘ .v ’ . .4 ' \1 ’ ‘ 6. ID. if number in answer #5 is smaller than number In answer #3, please check reason(s) for exclusion of some salesmen from described plan; a. Supervisory Duties b. Insufficient Experience c. Territory Considerations d. Other (please explain) Some companies operate subsidiaries that are service centers with a separate corporate name. Please indicate all company names that are included in your answers above. This will avoid duplication. if you indicated on Page 4 of the CLASSIFIER that item profita- bility was used in setting commission rates, please explain briefly how profit (or contribution to overhead and profit) is calculated and applied in setting commission rates. Total Company Sales of All Products in i964. (Please check the category below into which your company fails.) a. Less than SI million b. At least Si million, but less than $5 million c. At least $5 million, but less than $iO million d. At least $IO million, but less than $20 million e. $20 million or more Computed as a percentage of TOTAL COMPANY SALES in l964 (TOTAL COMPANY SALES considered as IO0.0o%) and reported to the nearest iOOth of I percent. Total SELLING EXPENSE was .....-___. $ (See top of next page for expenses to be included in SELLING EXPENSE) PAGE 8 .... v oi» ill .I t b o . . E c. e... o. .l . . . a o I , i v... . \ . X 4 . C... b l. I l t' ..n \. 6 .1 . .. . I, 1.. ~ . a .. . . ’. t o .. . SELLING EXPENSE for Calendar Year I964 (or Fiscal Year ending ) Please compute each component of SELLING EXPENSE below as a percent- age of the Total SELLING EXPENSE your company incurred during l964 or your fiscal year (considering Total SELLING EXPENSE AS lO0.00%) and report to the nearest iOOth of l percent. if you must estimate the figures because of lack of exact information, please do so to the nearest whole percent and mark figures a§_belng an_estimate. SELLING EXPENSE includes all expenses of your sales and order depart- ments; all fixed compensation paid to inside and outside personnel of these departments, including sales executives; all sales commissic sions and bonuses, prizes, etc.; all advertising expense; and all district sales office expense. FOR FIELD SALESMEN ONLY l. Total Fixed Compensation (salary, wages, etc. - see Page 2 of Classifier) paid to Field Salesmen was . % 2. Total expense to company for Fringe Benefits (see Page 3 of Classifier) for Field Salesmen was . 1 3. Total Incentive income (see Pages 4 & 5 of Classifier) paid to Field Salesmen was . % This was composed of: a. Commission Income (Page 4) I__? b. Other Incentive Income (Page 5) .__} 4. Total Expenses (Page 6 of Classifier), paid as an allowance to salesmen or in reimbursement to them for out-of-pocket expense incurred by them, was . % This was composed of: a. Automobile Expense (*) b. Entertainment and Other Expense(+)___,__} NOTE: (*) Include depreciation if you furnish car or reimburse ’saiesman directly for the use of his car. (+) Include only out-of-pocket expense a salesman incurs for which you give him an allowance or reimbursement. PAGE 9 IA’ 'JQAA4 7‘ \ ~J J .1 V. Hauhwmd.”figfimfih £322: 5;: 3.2:” .55 urn. “.0 «SE mmmhm>wZ 23:15... . :ONmok 922m 0:23;. icy... 2...??? 232823 I 230. .5 I Emmizaoz I 35:... e: <20:Sxo.w