Unique Aspects of the Mexican Environment
Managers at the Loctite Company are aware that the systems the corporation uses in the United States will not necessarily apply equally well to all its foreign subsidiaries. Thus they allow the managers of their foreign subsidiaries considerable autonomy in developing their own systems. These are among the specific characteristics of the Mexican environment with which Jose Monteiro must be concerned in designing and using his control system:
1. Highly competitive environment. Loctite de Mexico is a high-cost provider. It must face the risk of changing tariffs that, most recently, have been lowered to allow more foreign competition. And as a foreign subsidiary evaluated in terms of home country currency, it faces foreign currency risk. Intense competition is not unique to Mexico or just developing countries, but it is a factor with which Jose must be concerned. If his subsidiary does not compete well, it may not survive. There is little slack.
2. Shortage of skilled labor, particularly employees who are bilingual. This is common in developing countries. Jose must make sure he offers his good people a competitive compensation package or he will lose them. Because of the great opportunities for good workers, he may lose them anyway.
3. Culture. On average, Mexico and the United States are significantly different on three of the four cultural dimensions described in Chapter 16 of the textbook:
Cultural Dimension Mexico US
Individualism 30 91
Power distance 86 40
Uncertainty avoidance 82 46
Masculinity 69 62
Are these data representative of the employees who work for Loctite? If so, the relatively high masculinity scores suggest that achievement and material success are important in both Mexico and the United States, so incentives are likely to be effective. The individualism scores suggest, however, that Americans like individual performance assessments and incentives, while Mexicans are more oriented toward group harmony than individual self- interests. Will individual incentives work well in a group-oriented culture? The high uncertainty avoidance score in Mexico suggests that Mexicans are uncomfortable with uncertainty and ambiguity, preferring instead to have relatively high standardization of procedures and rules of behavior. This might suggest that formula-based incentive plans, like Loctite’s fixed-scale commission system, might be more effective in Mexico than plans assigning rewards based on subjective performance evaluations. (The power distance dimension does not seem directly relevant to the functioning of results controls at Loctite.) 4. Law. The Loctite de Mexico profit sharing plan was required by law.
5. Immature operation. Loctite’s Mexican subsidiary was relatively small, so Jose Monteiro did not have all the management and functional specialists, which might be available to managers of a larger subsidiary. And because the Mexican production processes were relatively new, he did not have accurate production standards.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructor’s Manual
Evaluation of Compensation System
Loctite de Mexico’s compensation system for salespeople has three elements. The profit sharing plan was mandated by law. As is true with all such plans, it is difficult to convince employees that this plan provided much, if any, incentive. Employees who perform spectacularly well do not earn any more from this plan than the worst laggards.
The salary increase system is not unusual. Evaluations were subjective. The primary challenge was to provide a competitive package.
The sales commission plan was based on sales growth, not the absolute level of sales. This is appropriate in an expanding economy, but it might have to be changed in recessionary times. Otherwise, many salespeople would likely have no possibility of earning commission. This happened in 1992, as 75% of the salespeople earned no commission in the first half of the year. What happens if the recession persists?
The bimonthly standard is the prior year’s total divided by six. If the markets are growing, why not base the standard on the prior bimonthly performance? The Loctite system will make it easier to show growth at the end of a year of growth than at the beginning because the standard is fixed for the whole year.
The commission chart rewards very high performance with a higher commission percentage. Thus the potential for a good salesperson was quite high. But if a salesperson had a particularly good year, might there not be an incentive to leave? The high performance creates a high standard for the following year. Salespeople will be tempted either to find a territory that had not had such good year or to leave the company. Is that what caused the top salesperson in each of the past 2 years to leave the company?
The leverage in the commission plans is high. The case says that in 1992, in a period when 75% of the salespeople were earning no commission because of the difficult economic times, one salesman earned a huge commission. Similarly, successful sales managers typically earned commissions of between 60 and 80% of salary and achievement of SOP targets accounted for another 10% of base salary. This is quite lucrative even by US standards. I think it must be said that these compensation plans definitely attracted the employees’ attention.
The commissions are based on sales, not gross margins because of the poor cost accounting system. This is a problem that should be fixed to as to motivate salespeople to sell the highest margin products.
No adjustments were made to offset bad or good luck. Is Jose doing this because he wants to simplify his life, or does he intuitively understand the high uncertainty avoidance among the Mexican people?
Special payments were made for house account sales, new customer orders, achievement of SOP targets, and top performance. The SOP targets are more numerous than most experts would recommend, and do all of these relate to the important goal of sales growth? But the other elements of the plan seem well thought out. The total set of features make for a complex compensation package, however.
Overall, these plans can be critiqued in any number of ways, some of which have been discussed above. Students will inevitably make other suggestions. For example, some might suggest basing all the rewards on an SOP-based system or on totally subjective evaluations.
Some may suggest measuring customer satisfaction or implementing some form of action control (sales activity reports). Some may suggest setting a sales plan and evaluating performance against that plan, rather than historical performance. Instructors should be prepared to examine the strengths and weaknesses of each suggestion. I think the class will decide to reject most of the suggestions for major changes. The current systems seem to be working reasonably well.
Competition among Mexico City Salespeople
The competition problem is caused by a lack of discipline in the system. If Jose Monteiro wants to fix this problem, and it appears that he does, he seems to have two options. One option, which is given in the last quote in the case, is to combine the Mexico City territories into one and to implement a group goal and reward. Given the low individualism score in Mexico, perhaps this is a good solution.
Another option is for Jose to give his salespeople direct orders:
1. Do not sell outside your territory. If you do, you will not get credit for the sale.
2. If you “give sales” to another salesperson or distributor in return for a sharing of the commission and you get caught, you will be fired!