Which Is Better? A Market Share-Based Incentive System or a Revenue-Based

Incentive System? Caselet 12.2. 7/20/2010

By: Marko Koterle, Slovenia

Lextron Corporation

selling medical equipment to hospitals

40% market share in U.S.

Phil Lehman is a successful salesperson at Lextron

Corporation

Sales territories: defined by metropolitan area

Commissions: based on sales volume

Before moving (working in Atlanta)

Phil was a selling leader in most product categories

Company products were present in 40% of hospitals in

the territorial area

Winning selling contests

After moving (working in Milwaukee area)

Phil results in the new area:

1st year: 6 major accounts

2nd year: 3 major accounts

Doubled market share

Products in 80% of hospitals

Problem: Share-Based System Vs. Revenue-Based System

Phil is paid less money in commissions now, despite

placing products in 80% oh hospitals

Not winning sales contests like he did when in Atlanta

Mark Green, regional sales manager, praised the

excellent work, however Phil is wondering why he is not

conpensated accordingly

Solution: Hybrid Incentive System

Step 1: Detailed market research

OBJECTIVES:

1. to determine metropilitan area value (H - hotel; PS –

potential sales; 1, 2..n – hotel in area)

MAV = H1 x PS1 + H2 x PS2 + … + Hn x PSn

2. determine each hospital life value (last year sales - s,

expected growth - g, expected economic timeframe - n)

Hosp.value = S + (1+g) x S + (1+g)^2 x S +.... + (1+g)^n x S

3. average hospital value (sales devided by number of

average hospitals serviced),

4. growth of population in the metropolitan areas,

5. predicted growth of number of hospitals in the areas,

6. sales growth per hospital

Step 2: Territory formation (territory map)

From the market research define territories based on similar

market value; either devide or merge metropolitan areas

based on MVP

(example: Milwaukee + Chicago could form one area to

compete with Atlanta

or Atlanta could be devided in two to be comparable to

Milwaukee)

Step 3: Yearly Ponder Calculus

PONDER = growth rate of hospitals x growth rate of sales in industry

Step 4: Hybrid System

Commission based on adjusted sales

Merging areas:

Territorial area Territory value 2011 Ponder Adjusted territory value

Sales in $ (%) Adjusted Sales

Milwaukee + Chicago

35 mio $ 0,9 31.5 mio $ 26 mio (74%) 23.4 mio $

Atlanta 23 mio $ 1,1 25.3 mio $ 9.2 mio (40%)

10.12 mio $

Splitting areas:

Territorial area Territory value 2011 Ponder Adjusted territory value

Sales in $ (%) Adjusted Sales

Milwaukee 11.5 mio $ 0,9 10.35 mio $ 9.2 mio (80%)

8.55 mio $

Atlanta 1 11.5 mio $ 1,1 12.65 mio $ 4.6 mio (40%)

5.06 mio $