Madison Fiber Corporation Case Solution

2. Summary of Problems faced

• The first challenge is deciding the appropriate and optimum amount of compensation that Madison is able and willing to pay out. It can either match the industry average or rival with the amounts paid by the top players in the industry.

• The second challenge is the method of compensation which perfectly fits in the context of recent structural changes and which supports the attainment of Madison’s business objectives.

• The overall business challenges include increased pressure from the top two competing corporations, both of which are operating close to full capacity. Another challenge is the instable and cyclical demand, which puts forward forecasting difficulties.

3. Summary of Key Alternatives    

• Status Quo: The current compensation plan includes a straight salary system coupled with an annual bonus. The amount of the bonus is a subjective decision based on evaluations of superiors.

• Straight Salary: This plan, backed by the controller, calls for a fixed salary amount independent of every variable except past performance of the employee.

• Straight Commission: Proposed by the sales representatives, this plan fixes 0.6% of sales as the monthly compensation, eliminating the concept of a fixed salary amount.

• Salary plus annual bonus based on product-line sales: According to this plan, the sales representatives are given a sales quota for each of the three product lines. For completing their quotas, they only receive their salary. For exceeding any quota by 3%, they receive a bonus equivalent to 1% of their salary. However, the bonus can never exceed 50% of the salary.

• Salary plus quarterly bonus based on capitalized sales expense: This is a complicated plan in which a ratio is established of the expenses that Madison is willing to incur to the sales. Then the salary and expenses of the sales representative are divided by this ratio to arrive at a bogey which is the dollar value of the sales that should be made. Any sales revenue in excess of this bogey is multiplied with a bonus percentage to calculate the bonus of the sales representative. 

4. Decision Criteria

• Alignment with business objectives, which involves increasing business with existing customers by becoming their primary supplier and generating new businesses by exploring new applications of their material. 

• The President’s constraints are important considerations. The first is to make sure that high performing sales representatives should not be disadvantaged due to the new compensation scheme. The second was that no sales representative could earn a bonus in excess of 50% of their salary.

• Employee satisfaction: Although not the most important, this is definitely a consideration for any compensation plan. An effective compensation plan needs to make reward and incentivize employees to perform to excellence.

5. Analysis of Alternatives