CHAPTER FIVE RESULT FINDINGS AND RESERCAH DISCUSSIONS 5.1 Result Findings For research findings, I will classify it into four segments which are this study s main focus: culture (vision & statement), core competence, incentive program, and structure change. Each main focus will be discussed in the following section. 5.1.1 Cultue From the process of interview, I found that some global companies have a very complicated and comprehensive incentive program. Some companies have unique and straight-forward approaches. As for company s vision & core value, Agilent is concern about how to continue HP s Way (spirits) of innovation, trust and respect for employees, build up a team work, and manage the company with integrity. After the spin-off from HP, Agilent has a new core value (Agilent s Way) on speed (quick reaction), focus on specific industry, and accountability. For Analog Device Inc., its vision is to become a number one analog-semiconductor company in the world and its mission statement is to serve customers with quality product, excellent service based on state-of-art technology. For Freescale, its vision is to become a global leader in the design and manufacture of embedded semiconductors for the automotive, consumer, industrial, networking, and wireless markets. For Microchip, the vision is to be the very best embedded control solution company ever. For Bayer, the vision is Science for a better life. Refer to Table 5.1 for the vision and mission statement for all interviewed companies. A company with good corporate culture will affect compensation strategy to attract and retain good employees and also influence employee s behavior and attitude to drive better sales performance. A good culture 83
development program will create a unified sales team to motivate sales performance. Table 5.1: Summary of Vision or Mission for Interviewed Companies Company Agilent Vision or Mission Statement Innovation, trust, team work, integrity (HP Way) Speed, focus, and accountability (Agilent Way) Analog Device Inc. Freescale Be a # 1 analog company in the world Quality product, excellent service, and state-of-art technology Global leader in the design and manufacture of embedded semiconductors for the automotive, consumer, industrial, networking and wireless markets Microchip Be the very best embedded control solution company ever Customers, quality, improvement, employees, product and technology, total cycle time, safety, profit, communication, Bayer With Bayer: Science For A Better Life to focus on innovation and growth in the areas of health care, nutrition and high-tech materials. Come up with innovations that benefit humankind. Respect employees, will to succeed, integrity & honesty, sustainability to actions, passion for stockholder IBM Wintech Customer, innovation, and integrity Balance among customers, company, and employees Innovation and execution Rich-Power Become a top demand creation IC company in Asia Integrity, open, share Source: From this research study 84
5.1.2 Core Competence From Table 5.2, you can follow each company s core competence. Innovation, team work, and the total solution will be the major approach. Some companies do have unique core competence such as Analog Device Inc. is focus on high end analog technology and Microchip is focus on the adaptation of tools and best services. IBM changed its core competence from high technology to IT service and then from IT service to software technology. Lots of companies claimed that innovation and team work are their core competence. For distributors, the total solution and logistics function are their core competence. A company can provide a good incentive program or total package to drive better sales performance only if it can build up more sustainable core competences in growing market segments to survive in the competitive environment. Table 5.2: Summary of Core Competence for Interviewed Companies Company Agilent Analog Device Inc. Freescale Microchip Bayer IBM Core Competence Operation Excellence, product innovation, customer royalty Innovation and team work High end analog technology Microprocessor, wireless, and automotive total solution Best products and tools to fit various customers needs Innovation and team work Best IT service with good team work, innovation, and total solution Wintech Rich-Power Total solution and logistic supports Marketing, engineering consulting, and logistics service Resource: From this research study 85
5.1.3 Incentive From Table 5.3, we see the different incentive programs from various industry segments. Both IBM and Agilent have dedicated incentive programs to drive their sales performance. Due to lower net sales margins, most electronics component distributors have simple incentive programs. Most component distributors need to carry logistic and service functions with only 6 to 7 percent gross margin and 1 to 2 percents net margin. As for Agilent, Analog Devices, Microchip, and Freescale, the business gross margins are from 60% to 45%. The net margins are from 34 to 10%. For Bayer and IBM, the gross margin used to be around 45-40% and net margin around 15-6%. The incentive program will be dependent on the business model, net margin, and product & market segments. For distributors, they offer bonus or commission to salespeople or FAE but do not offer the total package or any benefits. Table 5.3: Summary of Incentive Program for Interviewed Companies Company Agilent Incentive Program For customized solution, sales will be paid 60(salary)/40 (commission) and FAE 90/10 For simple product selling, sales be paid 70(salary)/30(commission) Offer result bonus bi-annually High performers will get award recognition, stock option, cash bonus, etc. Analog Device Inc. Bonus and stock option depend on design-win and performance Applied to sales, FAE, marketing, design engineers, and supervisors 86
Freescale Setting up personal goal for few extra months salary as the bonus Applied for sales & FAE Stock option also Microchip No sales commission Bonus and Merit Incentive depend on every quarter performance Offer restricted stock option in every year Applied to sales, FAE, and management Bayer Offer sales bonus according to Performance Management Plan Only for sales representatives IBM Bid by fixed month s base salary according its target assigned Set up by 75% region target and 25% individual target Classified into sales, technical sales, R&D or administration Personal target can be divided into four quarters performances and annual target The bidding process will be accounted for personal performance and team performance Top Guns and special award programs Win-Tech Annual bonus in Taiwan, quarterly bonus in China Everyone applied Depending on quarterly performance review and KPI No stock option or extra benefit Rich-Power Offer bonus, profit sharing, restricted stock option according to the reach quota number and yearly plan Applied to everyone Source: From this research study 87
For Agilent, its incentive program has been taken into consideration before calculating the sales performance. Agilent s compensation package has covered salary (both base salary & risk commission), bi-annual bonus which depends on company s performance, annual award recognition by stock option & cash bonus, and some benefits. Salary plays a higher percentage for simple product selling, whereas higher commissions are paid for customized solution selling. The major sales job is to discover sales opportunities. It is important to offer more on sales commission (30-40%) compared to FAEs commission compared to the commission of FAE s job which covers only 10% of salary. Most Agilent s sales promotions are designed locally so that the global transfer business will rarely be happened. Microchip s MICP (Merit Incentive Compensation Program) will depend on net sales margin (cost budgetary), so the MICP will depend on the company s overall performance on fixed income or flexible income. For Agilent, the sales commission will be paid no matter how the company s overall performance can achieve. When we design a good incentive program, we need to consider the company s strategy of its sales growth and performance. They do have high achievement award for country (branch office), regional (e.g., Asia or Europe), or worldwide. There is no ceiling for any good performers who can perform outstandingly compared to normal employees. For salespeople, you can consider them as the fixed cost to the company; another way is to recognize them as the contributors to bring in more sales revenues. Microchip used cost and margin concept. Agilent s sales costs have been included in all sales products. This is an interesting topic for accounting person to do the analysis. From IBM s new incentive program implemented in 1993, we can see the attractive incentive can stimulate personal and team s motivation. 88
5.1.4 Structure I ever talked to one global well known company manager. His division has been working on broadband telecommunication base station equipments. His division had a joint venture or acquisition with another global cellular phone company. For the base station telecommunication business, the organization structure is flat with more technical oriented approach. For cellular phone business, the organization structure is more hierarchical with more sales revenues concerned. After the joint venture, lots of efforts shall be exercised for structure change, the incentive program variation, and strategy in synergy with these two different divisions and segments. Refer to Table 5.4 for the structure changes with good incentive program implemented like IBM did, it can motivate and increase the sales overall performance. Table 5.4: Summary of Structure Changes for Interviewed Companies Company Agilent Structure Adaptation Spin off from HP New divisions on Bioscience measurement, nano-technology Analog Device Freescale Microchip Bayer Sold off non-profit divisions to be more focus After Backstone s acquisition, restructuring will be needed Set up new divisions to expand business New focus on pharmacy, nano-technology, bio-science IBM Reorganization in 1993 S/W focus and new acquisitions Sold out semiconductor industries Win-Tech Rich-Power More business from VMI and logistic needs Synergy from World Peace Holding Group Source: From this research study 89
The structure change needs to adapt to strategic change to fit market and organizational demand. Based on the needs of structure change with an attractive incentive program, it can drive personal and team sales performance. 5.2 Research Discussions for Each Interviewed Company I ever talked to one VP of Magana which is a worldwide automotive contract manufacturer (CM) as a Tier One supplier. He told me that his company s top management levels have less salary, but its incentive program mainly depends on individual divisional performance. The top levels have no pension program in order to keep them very aggressive to hit the firm s objective. For example, each division has a cost center to decide its performance in each quarter. Its front line workers do have higher portion on fixed salary but lesser portion on the incentive bonus. Its quality performance of front line vehicle will decide its incentive portion to keep at the reasonable quality level. Its culture is to force its top levels to make the right decision for the right market. Its following will describe its major difference between individual and team-based incentive. Refer to Table 5.5, we can know the comparison between individual and team-based incentive. Some companies prefer to have strong team spirits to lead a team but some companies prefer to combine both plans. Among these interviewed companies, IBM and Agilent have the most competitive total incentive package. In the following section, I will express more findings on each interviewed company. 90
Table 5.5: Summary of Comparison between Individual and Team-Based Incentive Favored Individual Incentive Plan Sales revenues are decided by the skills, capabilities, and efforts by each sales person (High sales causality). Favored Team-Based Incentive Plan Sales results was decided by the whole sales team efforts and it is hard to differentiate the contribution of each person. Performance measure is at personal level. Encouraging the super sales to be responsible for their own salesperson s territory. Performance measure is at team level. Measure at individual level is available. Teamwork leads to improve service quality, staffing flexibility, employee job satisfaction, productivity, and sense of unity. A good approach to differentiate the top performer and the bottom performer. Has lower variability than individual performance. This leads to more stability and security. Source: Zoltners & Sinha (2001) Agilent For after-sale service division of electronic measurement business, the existing incentive program will be applied since they are the existing main business. For gene- communication test and bio-analytical measurement, it will be interesting to know whether the same incentive program will be applied. In the next few years, Agilent will undergo its next phase transformation to micro arrays, diagnostics and informatics in bio-analytical measurement, aerospace-defense, communication test, low-cost measurement and nanotechnology in electronic measurement. As to the new 91
market segments even they can be functioned independently between each other without reorganization. The sale of Lumileds to Philips for $949 million will simplify Agilent s focus product segments, even though Lumileds has a higher margin in lighting industry. The selling of semiconductor products business to Avago for $2.6 billions, and the spin-off of their semiconductor test solutions business with $840 million will keep Agilent focusing on the sustainable higher margin with higher growth industries in the next decade with less exposure to the highly cyclical semiconductor market. I do believe Agilent can keep the business at a stable operating model and leverage its resources in some higher sustainable growth markets. Agilent may need some incentive programs to drive its sales growth and market shares. For new set up divisions such as micro arrays, diagnostics or informatics in bio-analytical measurement, higher commissions or incentive programs will be applied to sales division. For R&D and FAE, stable salary or good package will fit their needs. Agilent s existing package including salary (base + commission), result bonus, award recognition (stock option + cash bonus), and benefit is an excellent program. Its special award and recognition program can drive some supersales or outstanding employees. In view of change of the strategy and core competences, Agilent does have some aggressive incentive programs to keep the right people in the company. Agilent has a good strategy and vision to get into sustainable growth with good margins. Agilent 92
succeeded its main culture from HP and established its own new culture in speed, focus, and accountability. Agilent has set up a clear strategy and target for the next decade with its challenging incentive program and a good company culture. IBM With the strategy change from technology oriented to services oriented and then to software industry, IBM will face more challenges. IBM s future competition may come from Cisco s networking security, Microsoft s software operating system and information management, and other companies multimedia applications. IBM s main business still keeps on business to business infrastructure. For the short term, its service and IT business still keeps the main business, but its strong growth will happen in software related industries. For software R&D, more restricted stock option or total package will fit their needs. IBM used to hire the best college graduates to be trained and build up its own culture. IBM s guiding value is to fit customers needs with innovation and integrity and its core competence is to become the best IT service organization with good team work, innovation, and total solution. IBM had spent more than 4 billions U.S. $ in acquiring new technologies in 2006. Its core competence of changing from system service to software will become its challenge in the next decade. Its structure and incentive may need to adapt to the change of trend. The existing personal and team incentive plans will continue to drive its most business divisions. Its special reward (Golden Circle) and recognition program (Top Gun) will drive the best performers to keep on moving. The best company does provide the most completed incentive program in this dynamic and challenging 93
industry, but its strategy to get more involved in software business will be interesting to watch out. Its strong incentive & recognition award for top sales did encourage most sales teams. Bayer Bayer has three major segments of health care, crop science, and high-tech materials. It has a good company culture and value of the respect for people and nature. Bayer stresses on health care and new drug business, it believes that biotechnology and nanotechnology will be the most important technologies in the 21 st century. Bayer s strategy focuses on the strong growth fields with higher margin segments. Bayer has a very good pension program and post-retirement benefit with heath care cost. It pays bonus according to Performance Management Plan (PMP), and uses special bonus or salary increase to encourage its top performers. It has higher gross margin than IBM s (45% vs. 42%), but has much lower net margin than IBM s (5.9% vs. 14.6%). Its higher average employees salary (sales, administrative and R&D), good benefit, and pension will be the reasons to make such a big difference. Bayer has good vision, strategy, and core competence. Could Bayer learn from IBM s incentive program to reward top performers? The Germany government may have better social and welfare systems compared to U.S. does, so we have a hard time making any comparisons between these two countries. Can Bayer have better sales performance if it can implement more attractive incentive program to stimulate personal motivation? On top of company s strategy of incentive program, it is interesting to know whether countries socialism or capitalism system will affect 94
company s incentive program or total package. I do believe the function of capitalism system, a strong personal incentive program needs to be implemented. For socialism system, the total package or benefit (including pension and post-retirement health insurance) will be considered. Freescale Compared to Microchip & Analog Devices, Freescale s gross and net margins are far below industry average. After Blackstone s acquisition of Freescale in 2006, its reorganization and restructure have been implemented since then. From technology point of view, Freescale has some excellent technologies in sensors, radio frequency, power management and mixed-signal applications. From networking point of view, Freescale got a tight relationship with automotive big 3 (GM, Ford, and Chrysler) in automotive electronics industry. Freescale s incentive program is quite straight forward. It did not really drive and stimulate personal interests. Its incentive program only focuses on personal target instead of team s goal. Freesacle shall watch out where the profit goes. Its loss of profits may be attributed to costs of goods sold, labor cost increase, R&D expense, production quality, etc. After setting a clear strategy, Freescale needs to enhance its corporate management to gain a higher net margin in order to provide a better incentive program related to personal & team targets. For wireless networking division, Freescale relies too much on Motorola s cellular projects which are most ASIC and low profits industry. If a company relies on few customers with big market sales 95
percentages, it will be in a bad situation. Analog Devices Inc. (ADI) For ADI, its sales revenues have been 2.63B$ in 2004, 2.38B$ in 2005 and 2.57B$ in 2006. ADI has complicated products which include converters (40%), amplifiers (21%), power management (8%), other analogs (12%), general purpose DSP (8%), wireless chipset (9%), DSL network processor (1%), etc. There are lots of DSP or wireless products without good services. Lack of service from internal or external supports will be a serious concern for ADI. Its sharp reduction in sales of DSP-based DSL ASIC and network processor products forced ADI to sell this product line in the second quarter of 2006. Its wireless handset sales also declined as the demand of shipping to other competitors such as TI. From strategic point of view, ADI needs to streamline products to be more focus on few product lines to provide better supports for tools, marketing, and technical supports. Its top levels need to decide what kinds of technologies are needed to be acquired in order to build up some competitive segments to win back some business. For any new acquisitions or reorganizations, ADI needs to restructure to fit new market demand. ADI s core competence has been in the advanced analog segment for the last few decades. Acquiring new technologies to be integrated with existing analog & DSP technologies will be an important concern for ADI s future core competence. With its right product lines, a suitable organizational structure can be built up. A right structure with good incentive program can probably increase more sales revenue. At this stage, all concerns have mixed up with each other. Both personal and team incentive program shall be built up. Also reward and 96
recognition program can be exercised further on. Its existing incentive program will be too straight forward. Rich-Power World Peace Group (WPG) is a holding company which includes World Peace Inc., SAC, and Rich-Power. WPG carries most of worldwide top 10 semiconductor vendor lines with 3.1B U.S. $. Rich-Power itself did have $360 million in 2006. For Rich-Power, its existing core competence is to utilize vendors technologies to come out some total solutions or specific solutions to dedicated applications. Its synergy with WPG to provide logistic services for global contract manufacturing companies such as Hon-Hai, Asus, Quanta, Kinpo, and Liteon will become an important issue. The Just In Time (JIT) delivery and Vendor Management Inventory (VMI) have been implemented since the last few years. At this stage, Rich-Power, World Peace Inc., and SAC still function individually so their economics of scale effects have not come out yet. Rich-power s structure adaptation will follow any strategic change. Its core competence will depend on the total solution, logistics function, and design-in capability. To increase the design-in capability, Rich-Power needs to hire more application engineers to build up reference designs or solutions to create more design-in opportunities. Only the solutions approach can increase profit margin to provide some competitive incentive programs to stimulate personal motivation for its sales growth. The structure minor change may happen within Rich-Power itself to build up more design teams. To gain more synergies inside WPG, its needs of reorganization needs will be occurred. 97
WinTech Wintech is a thousand employees company with 1B U.S. $ sales revenue. Its core competence will be close to what Rich-Power has. The major difference is that Rich-Power belongs to a big holding company so its synergy & restructuring impact will be heavier than Wintech does. Shortening the end customers design cycle and providing vendors for their needs of end customers product needs will be core competence for Wintech. Creating the add-on values will be Wintech s future demands. In order to provide a good incentive program, distributors need to increase the add-on values and profit margins. If the gross margin is so low, the economics of scale will be needed in order to compensate most administrative cost. Building up a team with strong demand of creation and providing application solutions will be the key concerns for most component distributors. Microchip Microchip has a good culture with no sales commission and has team spirit to work globally as one team. Microchip s gross margin of 60.5% and net margin of around 33% are so terrific in the semiconductor industry. How to increase the sales revenue 100% with the same margin in the next five years will be a big challenge for them to accomplish. One good approach to increase sales revenue is to build up ASIC solution on big volume demands, such as in cellular phone, digital still camera, MP3, etc. but this approach will decrease the sales margin sharply. Most Microchip s existing products are generic products which can be applied to lots of applications, but with low volume and higher margin. Those generic products need a lot of technical services and supports. For lots of supports and various customers (there are more than 98
55,000 worldwide customers), we do require lots of efforts from direct resources and distributors helps. From margin point of view, we shall not and will not get into ASIC business. To increase its sales revenue, Microchip needs to sacrifice some margins in order to gain more market shares and sales revenues. To increase Microchip s sales revenue, it needs to acquire some companies or build up new divisions. Its structure needs to be changed. From previous acquisition experiences and synergy effects, Microchip prefers to build up new divisions from internal resources or to recruit new staffs from other companies. Microchip s core competence is the complete products and best tools & technical services for end customers. Most Microchip branch offices do provide different workshops and free technical trainings for end customers. The title of this thesis - How can a sales team drive a company s sales growth without sales commission? came from Microchip s no sales commission strategy. To build up its team spirit without selfishness, Microchip established its unique culture in nine years ago. Even though Microchip does not have commission, it provides the total package to most employees. Microchip s vision, mission statement, guiding values and its unique company culture will be addressed in appendix of this thesis. I do believe if Microchip has a competitive incentive program like IBM s or Agilent s, its salespersons may do a better job for the growth of sales revenue in the next few years. 99
5.3 Results & Fitting Analysis of Thesis Survey Questions In this section, we would like to discuss the relationship among these factors of compensation strategy, corporate strategy, corporate structure, corporate culture, and core competence to affect the corporate sales performance. From Table 5.6, we can understand that there are more relationships between corporate strategy and core competence but less effect between corporate strategy and corporate structure. Table 5.6: Framework criteria survey with eight participants Grade Compensatio Corporate Corporate Corporate Core Firm Sales n Strategy Strategy Structure Culture Competence Performance Agilent 4.8 4.7 4.7 4.9 4.5 5 ADI 3.6 4.1 3.5 3 4.1 4 Freescale 3.9 3.1 3 3.7 3.3 3 Microchip 3.5 4.2 4.3 4.7 4.3 4.8 Bayer 3.3 4.7 3.8 4 4.2 3.3 IBM 3.8 5 3 4.3 4.8 4.8 Wintech 3.1 4.3 3.8 3.8 3.1 3.8 Rich-Power 3.3 4.1 3.7 3.6 4.5 3.3 Source: From this research study As for Agilent, IBM, and Microchip, these three companies all have good grades on corporate strategy, core competence, and corporate culture with firm good sales performance. Based on the interview process with Agilent s management level, this company provided a good compensation program to stimulate most employees motivation. Rich-Power believed that they have a core competence but Wintech did 100
not consider that they have a strong core competence. Theoretically Rich-Power and Wintech shall have similar core competence from logistics function and solution provider. The difference shall come from the confidence level from top management levels between Rich-Power and Wintech. There are four companies (Agilent, ADI, Microchip, IBM) expressed that they do have a good sales performance. We can compare the relationship between Table 5.6 and Table 4.1 which demostrates the basic company performance by sales revenue, gross margin, and net margin. Refer to Table 5.6, we can see the fitness between this study survey and conceptual model. A good corporate strategy can always build up good core competence and corporate culture. The corporate structure most adapts to corporate strategy change. The compensation strategy did not play the major role on firm sales performance. From Table 5.7, we can see how the good incentive program can affect the salespeople, the sales activities, and the consistency with company strategy. The average grades of Table 5.7 shall be related to the grade of compensation strategy from Table 5.6. You can see that both Agilent and IBM ranked the highest grade from the sales incentive assessment. As we know both companies do have very comprehensive incentive program plus special award and recognition program. ADI, Microchip, Rich-Power, and Bayer got the same grade in this category. It is interesting to know that Rich-Power s top level believes that his incentive program can match sale s needs. Both Freescale and Wintech have very low grade in this sales incentive compensation survey since they have only year-end bonus without any other benefit program. 101
Table 5.7: Survey on Sales Incentive Compensation Assessment Scoreboard Grade Effects for salespeople Effects for sales Force activities Consistency with Company Strategy Agilent 4.7 4.8 5 ADI 4 4 4 Freescale 3 3.4 3.3 Microchip 4 3.6 4.3 Bayer 4.3 4 3.7 IBM 4 4.4 5 Wintech 2.6 2.2 2.6 Rich-Power 4 4.2 4.3 Source: From this research study 102