sales management
Eloquent People
MadisonFiberCorpCase.pdf
UVA-M-0425
This case was prepared by Derek A. Newton, John Tyler Professor of Business Administration, and revised in 2003 by
Alexandra Ranson (MBA ’04), under the supervision of Robert E. Spekman, Tayloe Murphy Professor of Business
Administration, as the basis for class discussion rather than to illustrate either correct or incorrect handling of an
administrative situation. As all data have been disguised, this case should not be used for research purposes. Copyright
© 1993 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 7/04.
MADISON FIBER CORPORATION
Early in February 2000, executives of the Madison Fiber Corporation of Baltimore,
Maryland, were discussing some proposals to modify the company’s sales-force compensation
plan. The discussion had been prompted by the recent broadening of the product line and by
widespread disenchantment with the current compensation plan, a straight salary system with an
annual bonus set by means of subjective evaluations. Furthermore, Madison executives had
recently reorganized the sales force. They believed that, if changes in compensation were to be
made, now was the most appropriate time to make them.
Company and Industry Background
Madison produced synthetic fibers, yarns, and fabrics. The company was founded in 1955
to serve a rapidly changing carpet-manufacturing industry. Subsequent to its founding, the firm
made several major breakthroughs in synthetic fiber technology and production. These advances
enabled Madison to become a significant supplier of synthetic carpet fiber as well as to make
competitive entries into related fields.
Madison’s three major product lines were synthetic carpet fiber, yarn, and industrial fabric.
Madison’s synthetic carpet fiber—a monofilament—was used by leading carpet mills that
produced tufted and needle-punch carpets for commercial and residential use. The company
manufactured synthetic yarns by twisting monofilament synthetic fibers into multifilament and
ribbon styles for a variety of applications, such as webbing in aluminum lawn furniture, grilles on
high-fidelity speakers, and automobile seat covers. By weaving the yarns, the company
manufactured industrial fabrics used as bagging for products like seeds, beans, fertilizers and
minerals, and sheeting for such applications as tents, swimming-pool covers, industrial wraps, and
tarpaulins. Because monofilament fiber was the base material for carpet fiber, yarn, and fabric,
companies competing in any one of those markets tended to compete in others as well.
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Madison executives expected competitive pressure from industry overcapacity to become
intense by the end of 2000. They ranked Madison fifth among its competitors in manufacturing
capacity and estimated that the largest firm in the industry was four times Madison’s size. Selected
market estimates, forecasts, and sales data for carpet fiber and other Madison products are shown in
the table below.
Actual Forecast
Sales Volume (000s of pounds) 1998 1999 2000 2001 2002
Carpet-fiber industry (est.) 1035.2 1097.8 1119.8 1142.2 1165.0
Sales value ($000s) 1998 1999 2000 2001 2002
Madison carpet-fiber sales $106.1 $109.3 $115.8 $122.8 $130.1
Madison market share (est.) 10.5% 10.6% 11.0% 11.6% 12.2%
Madison yarn sales $51 $54.9 $67.7 $83.0 $102.7
Madison fabric sales - $3.1 $15.3 $16.9 $18.5
Madison total sales $157.1 $167.2 $198.8 $222.6 $251.4
The carpet fiber market
For many years the dominant materials used in carpet manufacturing were of natural origin
such as wool. During the 1960s, synthetic fibers began to take a larger share of the market.
Madison and its competitors moved quickly to increase their capacities for manufacturing synthetic
fiber. After stagnant sales in the early 1990s, in 1997 and 1998 the carpet-manufacturing industry
experienced strong sales growth, and many firms were at or approaching full capacity. Madison
executives believed that the period from 1999–2004 might promise a 4 percent annual increase in
industry sales. Accordingly, using 1995 capacity as the base of 100, Madison executives were in
the process of adding capacity to increase this figure to 115 by the end of 2000 and to 155 by the
end of 2004. Most carpet customers (with a few notable exceptions) were located in the South with
the majority in or around Dalton, Georgia.
The yarn market
Because of the many potential applications for synthetic yarn and fragmented industry data,
company executives could not estimate potential sales volume or Madison’s share of the synthetic-
yarn market. Company executives believed that Madison’s sales were limited only by its ability to
create customers and by available machine time. The company backlog of firm orders extended
into the middle of 2000. The available data indicated to company executives that Madison had a
small and spotty share of some of the applicable markets for synthetic yarns in 1999. For instance,
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they estimated they had 8 percent of the grille cloth market, 15 percent of the static automobile
seat-cover market, and 8 percent of the declining market for lawn-furniture webbing. Most of
Madison’s yarn customers were located near Chicago or other large industrial cities. Many
potential yarn markets and customers were not being covered at all.
The industrial fabric market
Because executives had waited to develop truly superior products, the firm was late in
entering the industrial-fabric market. Madison fabric products were introduced during the last
quarter of 1998. Demand for this material was so great in 1999 that the company was able to sell
all of its limited production. There was no discernable geographic pattern among potential fabric
customers.
Madison’s Marketing Activities
Madison was organized into four departments: marketing, finance and administration,
operations, and research and development. Each department was headed by a vice president, who
reported to the company president. Three of the departments employed fewer than 60 people;
operations employed more than 400. Reporting to the vice president for marketing were a
customer-service manager, a sales manager, and three product-development managers (one for
carpet fibers, one for yarns, and one for industrial fabrics).
The customer-service manager handled telephone contacts with customers, solving
customers’ billing, delivery, and technical problems. She also served as an “inside” sales
representative, referring sales leads and requests for product information to the appropriate sales
rep. These inside sales activities, however, were always credited to the sales rep assigned to the
account.
The product development managers helped sales reps and customers solve technical
problems; analyzed the current and potential market for their products; suggested product-
development or line-extension opportunities; developed specifications for new and proposed
products; and forecasted demand for new, existing, and proposed products by making appropriate
economic and profit analyses. The product-development managers were expected to be technically
expert with regard to customers’ manufacturing techniques, as well as familiar with the market
place and likely prospects for new and existing product offerings. Unlike a typical “brand
manager,” the product-development manager had no responsibility for sales volume or profits.
The sales manager developed sales plans by product, territory, and account and also
directed the sales force. The current sales manager had been promoted to his present position in
January 1999, after ten years as a Madison sales rep. He was 42, a college graduate, and earned
about $90,000 a year in salary and management bonus.
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Because the equipment used to manufacture synthetic fibers, yarns, or fabrics represented a
substantial capital investment, the company’s basic business strategy was to attempt to operate at
full capacity (normally two shifts) at all times. Fluctuations in the consumers’ demands for
carpeting and competitive or technological developments, however, often created undersold or
oversold conditions.
Capacity-forecasting and profit problems led Madison executives to take steps to reduce the
firm’s heavy reliance on the carpet-manufacturing industry. Accordingly, they decided in 1997 to
broaden research and development in yarn and fabric areas for other industries. In 1998, Madison
diversified into industrial fabrics and began a marketing strategy to increase the proportion of sales
of products other than carpet fiber.
In the carpet market, Madison’s new strategy was to increase its share of business with
high-volume accounts where it could become the primary supplier. Historically, Madison had been
the secondary or tertiary supplier in such accounts, a condition that exacerbated the cyclicality of
the business. A second objective was to reduce dependence on small accounts whose positions in
the market place were marginal from the standpoints of credit and potential growth.
In the yarn market the strategy was to find new applications that would appeal to
manufacturers with high poundage or high square-foot requirements. New customers had to be
found beyond manufacturers of furniture, automobile seat covers, and grille cloth. Applications
that would not generate significant volume were considered unattractive because of their low
margins.
In the industrial-fabric market, the strategy was to provide improved material and new
applications in volume for customers who were using or were likely to switch to superior synthetic
fabrics in some of their present or new end products. Examples of such products were specialty
bagging (sacks, bales, bags), swimming-pool covers, tenting, tarpaulins, and industrial product
wraps. Management estimated that much of the domestic market was concentrated in 100 large
potential accounts. Major marketing efforts were to be undertaken at first, however, with only the
largest potential customers with high-volume applications. This strategy required a very high
investment in weaving and coating equipment. Madison was obliged to take on heavy debt to enter
this capital-intensive business.
Sales and Sales Management Activities
The job of the Madison sales reps was multifaceted. First, they were expected to service
Madison accounts and obtain orders for all Madison product lines. By virtue of personal
acceptability and technical competence, they were expected to assist customers in determining
appropriate inventory levels, to monitor and correct possible problems regarding the quality of
delivered products, to monitor and correct Madison’s delivery service, to handle complaints, and to
serve generally as on-the-spot trouble-shooters.
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Second, the sales reps were expected to increase the proportion of business that Madison
was obtaining from each account. Because most larger companies, particularly those purchasing
carpet fiber, preferred to purchase from several sources, it was important that the sales reps
penetrate past the customer’s purchasing office and become influential with all important decision
makers within the customer’s operation.
Third, the sales reps were expected to work closely with the product-development managers
to seek new applications for existing products and extensions of the product line and to introduce
new products to present and potential customers. In effect, between working with accounts and
developing a close liaison with the product-development managers, a good part of the sales reps’
jobs was to manage relations between the Madison plant and its customers.
Fourth—and increasingly important given the company’s efforts to reduce its dependence
on carpet-manufacturing customers—the sales reps were expected to prospect for new accounts for
yarns and fabrics. They were responsible for generating leads by observing, listening, reviewing
such sources as the Thomas Register, and following up inquires forwarded from the customer-
service manager.
Thus, sales reps were required to call upon many different kinds of customers, ranging from
large carpet manufacturers to small grille-cloth weavers to industrial-packaging firms. They could
experience considerable difficulty in determining who and where the likely prospects were for a
number of quite different product applications. Finally, the company’s marketing strategy was still
in the process of evolving, forcing sales reps to tailor their activities by industry and by geographic
area.
Late in 1998, the sales organization had been reduced from two regional managers
supervising 14 Madison sales reps and four commission agents to a single sales manager
supervising 12 sales reps. This action had been taken after a detailed study of the sales reps’
activities had revealed that the sales force was underutilized. As a consequence, each territory had
been studied to determine the optimum number of calls per day from a well-planned itinerary.
Each current account was analyzed to determine how many calls per year were required to cover
the desired amount of service and selling time. A similar procedure was undertaken with respect to
current and potential prospects. This analysis produced the current territory assignments and a
concomitant increase in the number of required and actual sales calls per week. As Exhibit 1
shows, the dollar sales for 1999 were similar among the sales territories, except for the Atlanta
territory with its large concentration of carpet manufacturers.
The current sales reps had been with Madison from four to twenty years. They had been
hired as experienced sales reps and their ages ranged from 33–52. The company had no formal
training program beyond a two-week tour in the plant to gather technical knowledge and a two-
week tour in the field with an experienced sales rep to “learn the ropes.”
In 1999, in recognition of the sales manager’s increased span of control, three control forms
were instituted to monitor the field activities of the sales force. The first was a weekly itinerary
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submitted by the sales rep to the sales manager. It listed the sales rep’s planned calls by account
and by day. It was faxed to the sales manager on Friday to cover the following week. The second
form was a trip report, which the sales rep filled out after each call. The sales rep listed the
account’s name, persons contacted, purpose of the call, results of the call, whatever marketing
intelligence he or she had gathered, and whatever follow-up action should be taken by the sales rep
or by the Madison plant. For a serious complaint, the sales rep was required to fill out a complaint
report in seven copies, which were routed to various departments within Madison, depending upon
the nature of the complaint. This form was also used to request price adjustments and to advise
other Madison departments of problems with service, billing, pricing, delivery, and quality control.
The sales manager tried to maintain personal contact with each of the 12 sales reps by
telephone at least once a week. His objective was to spend two and one-half to three days a week
in the field working with the sales reps and calling on customers with them. This schedule
permitted him to work in the field with each sales rep for two or three days in each quarter. An
annual sales meeting, usually held in February, brought all the marketing and sales personnel
together in Baltimore. This meeting, a combination of social and business activities, was the
company’s major opportunity to inform the sales force of technical developments in the Madison
product line and to review marketing plans.
The sales manager conducted a formal performance review with each sales rep at the end of
the year. The review took place either in the field or during a sales rep’s visit to the Madison plant.
The vehicle for performance appraisal was a two-page sheet that provided space for the sales
manager to write a subjective appraisal and developmental action plan in each of six areas:
technical knowledge, quality of work, quantity of work, initiative, relations with Madison
personnel, and office procedures. These criteria were used throughout the company, and the form
was standard for all departments and for all nonmanagerial employees.
The current compensation plan for the sales force paid a straight salary that, in 1999,
averaged $62,000, plus a year-end bonus ranging from $5,000 to $7,500 per person. The size of the
bonus depended on the collective subjective judgments of the sales manager, the marketing vice
president, and the president. Seldom, according to the sales manager, was the size of the bonus
related directly to sales dollars produced. In addition to earnings, the sales rep received all normal
fringe benefits, plus a company car. He or she was reimbursed for all normal business expenses
after submitting a monthly expense report.
The Compensation Issues
The first problem that senior executives had to deal with was the appropriate amount of
compensation. Madison executives estimated that the average sales rep’s earnings in the industry
were approximately $75,000 a year (including company car), although sales reps for two of
Madison’s larger competitors probably averaged about $90,000 a year. Earnings for the top sales
reps in the industry appeared to be earning in the neighborhood of $100,000 to $125,000 a year.
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The sales manager recognized that Madison sales reps’ earnings were close to the industry
average. But he argued that, because it was a small company relative to its major competitors,
Madison should pay more than average compensation in order to attract and keep the best possible
sales reps. The controller argued that, because turnover was almost nonexistent, there was no need
to pay Madison sales reps more than they were already getting.
The second issue was the method of compensation. Firms in the industry exhibited
considerable variety in methods of compensating their sales reps. Two of the large firms paid
straight salary only. Some smaller companies used commissioned agents who paid their own
expenses from a commission rate of 1½ percent of their sales. Most of Madison’s competitors,
however, used a salary system with some form of bonus payment. Each of these methods had its
adherents within Madison.
The president indicated that the decision of how the sales reps were to be compensated
would be left up to the sales manager, the marketing vice president, and the company controller.
He placed two constraints on their decision, however: (1) no sales rep doing a good job should
suffer financially from a change in the pay plan; and (2) if a bonus system was instituted, no sales
rep could earn more than 50 percent of his or her salary in bonus, because the Madison managerial
bonus plan had the same limit.
Accordingly, the marketing vice president, the sales manager, and the controller met to
discuss the options they had studied over the past six months. These options are described below.
Straight salary
The controller advocated paying sales reps a straight salary and basing future salary
adjustments on past performance. He argued that a straight salary would give managers tight
control over the sales reps’ order taking and account servicing. Because much of the sales reps’
success depended upon their ability to bring the internal resources of the company to bear on the
solution of customer problems, the “credit” for the sale belonged to everyone in the Madison
organization. Furthermore, much of their business was “handed to them on a silver platter” and
was not a direct consequence of their individual initiative.
The sales manager disagreed. He maintained that straight salary gave sales reps no
incentive to develop new business or to increase business with current customers, and that these
objectives were the real focus of their efforts. He added that both these activities were critical to
the success of the company’s strategic shift in product and customer emphasis. Furthermore, he
maintained that salary adjustments would be determined by the same subjective evaluations that
made Madison executives uncomfortable in determining bonuses under the current system.
Continuation of current plan
The major argument for continuing the present plan was based upon the marketing vice
president’s idea that “the devil you know is better than the devil you don’t.” He maintained that the
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current system had the advantages of familiarity and control over unexpected events. He
recognized, however, that the current plan was favored neither by the sales reps, who had been
complaining about the subjectivity of the bonus determination, nor by the sales manager, who was
particularly uncomfortable when explaining to the sales reps the basis for these subjective
judgments.
Straight commission
Straight commission was the plan favored by the sales reps. The commission rate under
discussion was 0.6 percent of sales, paid monthly. The sales reps argued that they would be
inclined to work harder if they were treated “as if they were in business for themselves,” and that
their efforts to maximize their own incomes would maximize the achievement of company
objectives. The controller pointed out to the sales manager and the marketing vice president that
straight commission meant that, as the firm grew and increased its efficiency, it could never
improve its ratio of sales to cost of selling. The marketing vice president expressed the opinion that
he did not want the sales reps “in business for themselves.” He wanted them “working for
Madison.” The sales manager sympathized with both of these reservations, but he thought that
straight commission might make his managing job easier because he would have to do less
“booting them in the tail.”
Salary plus annual bonus based on product-line sales
The sales manager proposed an annual bonus based on product-line sales “over quota.” He
favored establishing quotas for each sales rep for each major product line—carpet fiber, yarn, and
industrial fabric. At 100 percent of quota for each product, sales reps would receive no bonuses,
but for each 3 percent in excess of quota for each product line, a sales rep would receive a bonus of
1 percent of salary. Thus, if a sales rep exceeded his or her personal quota for each of the three
product lines by 9 percent, the annual bonus would be 3% + 3% + 3% or 9% of salary. The
maximum bonus would be 50 percent of salary. The annual bonus would be supplemented by a
one-time award given for each new account to equal one-tenth of 1 percent of the new account’s
first-year sales, with a maximum payment of $600 per account. This payment would be made as
soon as possible after the anniversary date of the new account’s first order.
The controller was less than enthusiastic about his plan, maintaining that the quotas might
be set too low, resulting in overpayment to the sales reps. He also wondered about the effects of
windfall sales. The marketing vice president wanted to know how the sales manager planned to
make the quotas fair, because sales in the past had sometimes been limited by plant capacity.
Salary plus quarterly bonus based on “capitalized sales expense”
One of the product managers had passed along to the marketing vice president an article
describing the “capitalized sales expense” approach to compensation. This method required that
managers first determine the sales expenses that they were willing to incur. This expense was
expressed as a percentage of sales. The salary and controllable expenses incurred by a sales rep
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were then divided by this percentage. The resulting amount, called a “bogey,” was to be used as a
dollar sales quota. The sales rep would receive a bonus for sales in excess of the bogey. The bonus
would be set at a fixed percentage of these excess dollar sales, at a rate below the figure for the
desired sales expenses, expressed as a percentage of sales. No bonus could exceed 50 percent of a
sales rep’s salary.
The marketing vice president was intrigued enough by this idea to calculate some
percentages illustrating it. He set desired sales expenses at 1 percent of sales and set the bonus at
0.5 percent of sales in excess of bogey. He then figured the quarterly bonus for a sales rep who
earned a salary of $18,000 for the three-month period, made $2,700,000 in sales, and incurred
$6,000 in expenses during the same period.
3 month’s salary + 3 month’s controllable territory expenses = Bogey
0.01
(3 month’s sales - Bogey) 0.005 = Bonus
$18,000 + $6,000 = $2,400,000 = Bogey
0.01
$2,700,000 - $2,400,000 = $300,000 (sales in excess of bogey)
$300,000 0.005 = $1,500 (bonus for the quarter)
The marketing vice president felt that this system would appear too complicated to the sales
force, although he recognized that the bogey derived from capitalizing sales expense seemed less
arbitrary than a quota “plucked out of the air.” The controller felt that the system would be too
complicated to administer, although he realized that the cost of sales would decline as the sales reps
exceeded their bogeys. The sales manager noted that this plan neither emphasized sales by product
line, nor motivated sales reps to open new accounts. But he acknowledged that the system would
encourage sales reps to keep their expenses down, because spending less than budget would lower
their bogeys.
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Exhibit 1
MADISON FIBER CORPORATION
Individual Territory Results and Earnings in 1999
Territory
Number of Actual
and Potential
Accounts 1
Carpet Backing
($ mm)
Yarn
($mm)
Fabric
($mm)
Total
($mm)
Salary
Bonus
Atlanta 42 $32.3 $2.4 $0.0 $34.7 $58,000 $5,200
Baltimore 40 $10.6 $2.3 $0.0 $12.9 $49,000 $4,000
Boston 38 $2.4 $8.5 $0.3 $11.1 $51,000 $4,200
Chicago 48 $7.3 $4.1 $0.8 $12.2 $52,000 $6,000
Cleveland 41 $4.5 $6.8 $0.4 $11.7 $47,000 $5,500
Detroit 50 $3.6 $8.5 $0.5 $12.6 $48,000 $5,000
Houston 44 $11.3 $0.9 $0.3 $12.4 $44,000 $5,700
Los Angeles 45 $6.0 $4.7 $0.6 $11.4 $54,000 $5,500
New York 44 $12.2 $0.4 $0.1 $12.7 $57,000 $4,700
Philadelphia 36 $11.5 $0.4 $0.0 $11.9 $47,000 $4,200
Pittsburgh 42 $4.7 $6.4 $0.3 $11.4 $45,000 $4,200
San Francisco 42 $8.5 $3.7 $0.1 $12.3 $48,000 $5,800
TOTAL 512 $89.70 $38.30 $2.60 $167.3 $750,000 $75,000
______________________ 1
Potential accounts referred to identified prospects that the sales reps intended to call upon or had been called upon.
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