- Fagerhult Lighting
- Whitecroft lighting
- Atelje Lyktan
- Designplan lighting
- LTS Licht & Leuchten
- Eagle Lighting Australia
- Lighting Innovations
- Led Linear lighting Solutions
The Fagerhult Group have a decentralised structure operating in 40 markets with each local company operating entrepreneurially serving the local market. In the local markets the biggest costs come from staff wages and bonus/commission pay, as you can see from this it is an area which can be targeted for reductions to increase profitability if you can get it right without reducing turnover. The Fagerhult head office is based in Stockholm from where the sales targets for the regions are set. The Fagerhult Lighting factory is based in the Habo which is a municipality in Jönköping County, Sweden. Manufacturing also takes place in Finland, the UK, Germany, China, Australia, Sweden, Turkey and South Africa for the other brands within the Fagerhult Group. This project focuses just on the Fagerhult Brand as it has the largest sales within the group, it has the more regional sales offices and to keep the project as focused as possible the product range sold will be the same across the regional offices The sales of Fagerhult lighting goods are broken down into 3 product areas indoor, retail, and outdoor, however, for the purpose of this paper the product areas will be treated the as the same, with no differentiation made. To accurately account for the effects of the remuneration package on performance the paper focuses only on the sales force of Fagerhult Lighting across the regional countries detailed below.
This ensures that the products being sold are the same, however, there will be a variance in the return on sales figures in the countries which manufacture the product directly due to the contribution made from the factory and the reduction in transport costs. These countries are identified as:
Research by McKinsey & Company forecasts the lighting industry to top the 100 billion Euro point in 2020. Figure 1.1 – Global lighting product market trend Source: McKinsey & Company (2012) This represents significant growth potential for Fagerhult Lighting to increase market share with acquisition and organic growth through improved sales performance. Hence the motivation of the sales team are of particular importance to the business. 1.2 Aims and Objectives The aim of the research is to examine the motivations of the sales professionals within Fagerhult lighting and to produce an overriding variable pay package to support the business goals. The paper looks to answer 3 key questions:
- Is there a cultural difference in the preference for remuneration package within Fagerhult lighting?
- What are the effects of remuneration package on the firm?
- What are the effects of remuneration package on motivation?
From the research I will the apply the results to the companies in the regions addressing the sales cycle best practice for incentive setting as outlined by Zoltners, A.A. (2006) in figure 1.2. which shows the stages a company goes through from launch to maturity and how sales targets need to be aligned to this.
Figure 1.2 – Life cycle effects and sales compensation Source: Zoltners, A.A. (2006 Companies should tailor their incentive plans to be aligned with the business goals during the 3 phases shown above. The alignment of the sales force to these phases is essential in achieving sustainable profits. From the research I will put together an overriding incentive program based on the phases of launch, growth and maturity. Zoltners, A.A. (2006) identified 4 areas for performance measures when setting sales incentives:
- Data views
These areas will form the framework for the recommendations I will make back to the business. It has been noted by Ledford, G.E. (2014) that “The design and administration of incentive plans is complex, and the difficulty discourages many organizations from adopting new plans”. Variable pay has long been recognised as one of the factors which impacts on employee motivation. It has, however, been argued that it is not the only predetermined factor for sales success. Extrinsic motivation is without doubt a factor for increased motivation but intrinsic motivation such as personal growth and achievement have also been recognised as having a similar effect. For the purpose of this report I will only focus on the Extrinsic financial rewards. From personal experience I believe the motivations of the sales professionals change over time. Initially extrinsic motivations are more powerful but as time passes the motivations switch to more intrinsic motivations such as career progression. 1.3 Report Structure The report structure will follow a traditional thesis structure based on the BS 4821: 1990 as outlined below. In total the report will be no more 15,000 words Chapter 1 – has discussed the aims and objectives of the project and why it’s important to the business Chapter 2 – Will focus on the literature review and will address the key questions raised in the project. Chapter 3 – Delivers an in-depth analysis of the research and data collected and methods of collection Chapter 4 – During this chapter I will deliver the result do of the research and what I would do differently if I had the time again. Chapter 5 – Will deliver the conclusions from the research and how the overriding variable pay structure should be delivered. Preliminary Pages
- Title Page
- List of figures
- List of tables
- Introduction Chapter 1
- Literature Review Chapter 2
- Research Chapter 3
- Results Chapter 4
- Conclusions Chapter 5
1.4 Research Methodology The research methods used where a combination of questionnaires targeted towards the managing directors of the regions followed by a second questionnaire aimed at the sales professionals. This method was believed to be the best way to approach the data collection as the managing directors have access to more sensitive data and also it becomes a form of verification. The second phase of questionnaires will also be anonymous in an attempt to mitigate bias responses and to also increase completion rates. The format of the questionnaires will follow the Likert scale, this makes the response more quantifiable by not using a simple yes no answer, it also becomes familiar for the respondent and therefore easier to understand. Figure 1.3 – Phases in company facing data collection After the results of the questionnaires had been analysed, I moved onto to formulating and interviewing the managing directors via Skype for Business and also face to face interviews. The purpose of the qualitative study was to see how management felt about the variance between their answers and that of the sales force and to also gain a better understanding on the effects the variable payment structure had on motivation. It was a also an opportunity ask targeted questions about the culture in the local market, constraint and the culture in the business which is difficult to gage without face to face interaction. As the inward facing research was taking place, I started to gather information from the available literature to answer the questions raised by the aims and objectives. I firstly started studying literature on the motivations of sales people and what is regarded as motivational for the sales professional and what works for the business and then narrowing the focus onto how to set a motivational sales incentive plan and how it effects the business. The Imperial college library was used extensively as a research medium for the literature review, which often redirects you to online databases of case studies such as www.Sciencedirect.com and www.Ebsco.com. As well as published books from the library in hardcopy format magazines were also used for reference. Literature relating to the subject matter is varied and there are arguments for and against variable pay. Ledford, G.E. (2014) argues that variable pay increases performance and also creates a culture of performance. Whereas Kohn, A., (1993) believes that variable pay only achieve temporary compliance but in the long term damages relationships and moral. There is limited research pertaining to the creation of overriding incentive programs relating to the stage of business growth. Chapter 2 – Literature Review 2.1 Overview The focus of the literature review is to explore the effects of variable pay on the performance of the business, the motivations of the sales force and the effects culture sets on performance related targets and preference. A great proportion of the literature review come directly from peer review journals, published books and articles as these have the greatest credibility. The review is to determine what is known and what is not known about the subject and the holes which need to be filled by the research that is being undertaken. The literature review is broken down into sections starting with definitions of the key terms found I the research. The literature review then aims to answer what is already known about a) what motivational theory is pertinent to this paper b) the effects of culture on employee reward c) the effect of variable pay on sales professional motivation d) the effect of variable pay on the firm e) and what are the best practice approaches to financial reward. These form a list of broken down subtopics used to create the overriding formula for optimisation and are form the subsections of the literature review. The answer the questions the report raises the literature review will follow the teachings of Dr Mark Kenndy. Which states to achieve motivation you must get the basics right first, the reward needs to be of relevance to the receiver and then remove any demotivators. Breaking these teachings down into motivational theory it pertains to Maslow’s hierarchy of needs, Vrooms Expectancy theory, and Herzberg’s two factor theory. The literature review will address these theory’s and the empirical research relating to them. I will then address the work by Hofstede and the role this plays in motivation from the cultural aspect of masculine and feminine cultures and their motivators. Following on from them this the review will address the current and past literature on the effects of variable pay, as has been argued by Holthausen et al (1995) that managers will purposefully manipulate the sales figures when bonuses are at the ceiling level and Healy (1985) found that sales managers will even manipulate sales figures downwards when earnings are below the minimum threshold. Manipulation of figures in both contexts has an adverse effect on the business and decision making capabilities of senior management rendering them less effective. 2.2 Definitions What is remuneration? Remuneration is a combination of fixed monetary reward (salary) and variable pay for work or services to the firm by the employee. The variable pay could be in the form of bonus or commission pay which is paid over the course of the year What is motivation? Motivation drives an employee to exert effort towards a particular task or goal. These can be intrinsic motivations such as satisfaction for completing the task, personal mastery or autonomy. Extrinsic motivations relate to monetary reward such as variable pay, base salary or promotion. For the purpose of this paper will look at financial rewards in the form of financial rewards. What is Culture? According to Geert Hofstede (1991) culture is the ‘collective programming of the mind’. It could be based on the national level as the focus of this paper, regional, ethnic or religious levels. Culture is therefore a collection of people who have a shared customs, ideas and mind set. What is the salesforce? The sales force are a collection of field based sales professionals who meet clients and manage projects to generate revenue for the business and further repeat business. They work with a great amount of autonomy within their role and are trusted to manage their own time accordingly. During this paper the terms sales professional, sales person or sales people are used interchangeably. What is the firm? The firm in this instance is Fagerhult Lighting part of Fagerhult AB, listed on the on the Nasdaq Stockholm (Mid Cap). 2.3 Motivational Theory 2.3.1 Overview Motivational theory has been a topic of discussion for overs 100 years with one of the first known theories “scientific management” created by Frederick Winslow Taylor (1911). Taylor argues that money is essential in motivating workers to work harder which has later been argued by a number of later works by Herzberg who believes money does not motivate but the lack of it can be demotivating. McClelland who believed that workers could not be motivated by the need for money and it could only be used as a means of keeping score, later research by Chung et all (2014) provides evidence to support sales bonuses to enhance productivity. One of the most well-known is Maslow’s hierarchy of needs which places money low down in the priorities of workers but without it they will not be able to move to the higher levels of attainment. Vroom believes that the reward for working harder has to be of valence to the receiver otherwise they will not be motivated to work harder. From this you can see that there is great deal of literature covering the topic with money having varying effects on motivation and this literature review will look closely at Maslow’s hierarchy of needs, Vrooms expectancy theory and Herzberg’s two factor theory. 2.3.2 Maslow’s hierarchy of needs Maslow’s proposed his theory of needs in 1954, where people go through stages within their life and achieve levels of attainment. Maslow breaks these categories down into five buckets physiological, safety and security, love and belongingness, esteem, and self-actualization. These needs are shown sequentially with the basic needs (physiological, safety and security) lower down the hierarchy but having the most powerful impact on behaviour. Figure 2.1 – Maslow’s Pyramid of needs Source: McLeod 2007 Once the lower levels have been attained only then can a person move up the pyramid to the higher levels of attainment. Oleson (2004) defines the categories and gives examples in real life such as Physiological needs as being the most basic of human needs such as “food, water rest, shelter and other needs required to sustain life”. He states that a human being missing these needs will probably look for food as his main driver and all other needs would become non-existent. Once a person has satisfied their Physiological needs they then look for safety. Oleson likens this to a child who feels fear will often look for a source of comfort. After the basic needs have been fulfilled people will then look for love, companionship and social acceptance. The need to be loved and the need to give love are both strong desires and drivers. Next in the hierarchy of needs is esteem, humans not only want to be part of a social group but they desire respect, self-respect and status within the group. Oleson notes that the fulfilment of the esteem category leads to feelings of empowerment and usefulness. The pinnacle of the pyramid is self-actualisation and the drive for a man to be the best he can and fulfil his potential. Maslow believed that when the other categories are fulfilled the need for self-actualisation is extremely ‘potent’. 2.3.3 Empirical results Carpenito-Moyet (2003) explains in a peer reviewed journal the phenomenon of prospective nursing students choosing a four-year BS Nursing degree over the 2-year AD when the initial pay is the same, using Maslow’s hierarchy of needs. Carpenito-Moyet explains that the 3rd and 4th levels of the hierarchy, which are belongingness and esteem, motivate these students. It shows that the nurses do not work better or harder for more money; they work better and harder because it increases their sense of belonging and esteem. In another peer reviewed journal by Olesen (2004) shows contradictory results to the study conducted by Carpenito-Moyet. Olesen’s research study explores the relationship between basic needs and money attitudes in a university‐age cohort by the application of Maslow’s hierarchy of needs. Olesens results confirmed a relationships between needs and money attitudes. With all of Maslow’s needs appearing to be strongly related to the money attitudes of evaluation and anxiety. 2.4 Vrooms Expectancy theory Luneburg (2011) states expectancy Vrooms theory is based around three categories expectancy, instrumentality and valance. In essence this is the increased effort exerted by the employee will result in an increase in performance, the increased performance will lead to a reward and the reward will be of interest to the employee or receiver. Vrooms expectancy theory according to Lunenburg (2011) is has made four assumptions. These assumptions are firstly that people join companies with expectations about what they need and what motivates them. The second assumption is their behaviors are the product of conscious choice. The third assumption made is that people are different and want different things from the firm. The last assumption made is that people have a choice of rewards to suit the outcome for themselves. Expectancy theory is classed as a cognitive theory as opposed to Maslow’s theory which is classed as a content theory. The main differential is Vroom does not make any suggestions as to what motivates people as all people are different and the variables of motivation differ across workers. Suciu Maria Mortan & Lazăr (2013) state that although expectancy theory is widely tested it is extremely difficult to test the theory as Vroom intended due to the lack of understanding of the concepts and clarity in the testing methods. They also believe that due to the difficult nature of model it becomes difficult to measure. 2.4.1 Empirical results Moizer and Pratt (1988) conducted research into the evaluation of performance in firms of chartered accountants their project involved testing using a modified form of Vroom’s expectancy model. Only one of the three effort measures which was classed as aggregate effort produced strong support for the model. They also found that staff perceived there to be a link between increased effort and performance which supports Vrooms theory. Most interesting they found that age was also important determinant in effort with older respondents exerting less effort that younger employees. In a more recent peer reviewed journal relating to performance reviews and their effect on motivations in the Romanian Civil service authored by Suciu Maria Mortan & Lazăr (2013) found that in the case of performance appraisals this lead to an increase in expectancy and hence motivation. The report found that a positive appraisal will result it positive outcomes where as a negative appraisal will lead to poorer prospects. Lawler and Suttle (1973) examined eighteen previous expectancy theories and derived that using expectancy theory to predict performance showed no correlation with intellectual ability especially in sales roles. They is believed to significantly test Expectancy theory new measurements must be created as it has become too complex. They also believe if “it is necessary to measure motivation, it probably is best to measure just a few simple expectancy attitudes since these seem to work as well as the more complex combinations.” From the eighteen studies examined they also found that there was a “significant expectancy behaviour relationship” which is supportive of the model with a significant relationship found between expectancy and performance. 2.5 Herzberg’s two factor theory Herzberg’s (Herzberg 1974) two factor theory suggests that people have different needs which can be broken down into two categories, satisfiers and dissatisfies. Dissatisfiers known as hygiene factors are not related to the work itself but the context based around the working environment. For example you would not want to work in an environment which was dirty and un hygienic as this would de motivate you. This, however, does not work in the other direction, if the working environment was clean you would not be motivated to work harder. These factors can be the reward system, salary, interpersonal relations, status, company policy and security. Satisfiers are also known as motivators as they create a positive attitude and create job motivation. Job satisfiers relate to growth, advancement, responsibility, the work itself, recognition and achievement. There is a common misconception that salary is only a hygiene factor, however, in Herzberg’s 1974 works he clarifies the point that: “Because of its ubiquitous nature, salary commonly shows up as a motivator as well as a hygiene. Although primarily a hygiene factor, it also often takes on the properties of a motivator with dynamics similar to recognition for achievement”. Interesting (Herzberg 1974) notes that all people are different and a singular hygiene factor or motivator can have a different effect on individuals. Also in certain circumstances such as “hygiene shocks” motivators can become demotivators and hygiene factors can also become motivators across the business but whatever the outcome sources of demotivation need to be talked quickly. 2.5.1 Empirical results In a study into the motivations of seasonal workers in the hospitality industry empirically tested Herzberg’s theory (Lundberg, Gudmundson & Andersson, 2009) in general they found that their research supported the theory. They found that seasonal migrant workers where less interested in pay as there where about meeting new people. Most interesting, however, resident workers were much more concerned about wage than they were about meeting new people. They conclude that the reduction in wages makes up for the lower wages of the migrant which is offset by the prospect of meeting new people and vice versa for the resident community. In an earlier study (Hines 1973) looking at the cross cultural differences in two factor motivation theory was also supportive of the works by Herzberg. Hines conducted the study into workers in New Zealand across managers and employees and found that the model was valid over different occupational levels. This research findings support that efforts for job enrichment to increase motivation but also concludes the that culture has an effect and should be taken into account with applying motivational models across geographical regions which is aligned with Herzberg’s 1974 study. In a separate more recent study (Matei, Abrudan, 2016) conducted in Romania found that Herzberg’s theory was not relevant in the cultural context of Romania. From a contextual stand point they believed that the theory was relevant, however, the motivators and hygiene factors were found to be different. Interestingly and relevant to this study is they also touch on the relevance of Hofstede’s theory of masculine and feminine cultures and how this should be evaluated when trying to identify what motivates individuals. The conclude that motivational concepts and theories should only be presumed to be relevant within the environment that theory originated. They also believe that the theories of motivation can be applied across geographic regions but these should be applied with caution, which again reaffirms the 1974 works by Herzberg. 2.6 The effects of culture on employee rewards Geert Hofstede conducted one of largest studies in to the effects of culture in the 1980’s at the time it was the largest study of its kind involving some 117,000 samples. He used data for his research from IBM and later wrote another version in 2010 expanding on his theory to include a sixth dimension. The theory is built upon the premise of six dimensions which can use used to examine and determine the cultural effects a change in reward system may have on motivation. The dimensions are: Power Distance – This relates to how close the lower level employees may be with the highest ranked employee. In other works how ridged the hierarchy is within the nation, business or social group. Individualism v Collectivism – the individualism v collectivism dimension relates to how close the sociality is knitted together. In a indivulaism bias culture the ties between people will be weak which is the opposite to the collectivism, in this culture if issues arise people will be more willing to help. Uncertainty avoidance index – the uncertainty avoidance is related to the status quo in some societies what is different can be viewed as dangerous. In essence uncertainly avoidance is “tolerance of the ambiguous and unpredictable” (Hofstede 2010). Masculinity vs Femininity – this is perhaps the most pertinent area for this research paper. Masculinity relates to cultures which relish achievement higher salaries, assertiveness and material reward. In contrast feminine cultures place more importance on working relationships, cooperation and look to avoid conflict. Long term vs Short term orientation – this was a later addition to the original dimensions added after working with Chinese colleagues. Long term relates to fostering of virtues towards future rewards such as perseverance. In contrast to thisshort term orientationstowards the past and the present day with more focus on traditions and fulfilment of social obligations. Indulgence vs Restraint – this dimension up made up of three components a) happiness b) Life Control and c) Importance of leisure. The measurement of happiness was measured as a percentage with respondents being asked how happy they are. Life control relates to how free the individual is in society to make their own path in life without restraints. The importance of leisure like happiness are measured as a percentage with all three components closely correlating to one another. 2.6.1 Empirical results A cross-cultural assessment was conducted between users of twitter in the USA and Korean (Choi, Im & Hofstede 2016). The findings generally support the claims made by Hofstede in earlier cultural assessments, they found that the Koreans would send more friendly tweets in support of individuals whereas the Americans would tweet more about themselves and where generally found to be less supportive. The Koreans also showed traits of a feminine culture in support of achieving group goals, friendly support for each other and displays of group harmony. They warmly welcomed new users into groups and placing less credence towards increasing their own agenda. Interesting the Americans did not send any friendly tweets and they showed a preference and concentration towards completing individual tasks. In a separate study looking at the organisational culture and quality improvement (Maull et al 2001) found that different cultures where found within working groups in the same firm. They noted that in some instances business units were more interested in sales volume whereas in contrast to this some groups believed that increasing the quality of the product on offer would be of greater benefit to the firm. This is in supportive of Hofstede 2010 who identified that although his research was conducted over a national level he identified that it should be and more importantly, researched at a social group level, however, he noted that this would be extremely hard to do due to the interlinking of groups across age, nationality, social circles, competencies and values etc. In contrast for the support found for the work of Hofstede a study was conducted into the influence of national culture and organisational culture within the hotel industry (Nazarian, Atkinson & Foroudi 2017) which did not support the claims made by Hofstede in all dimensions. The study was conducted over ninety six hotels in London and there was a positive correlation in some of the Hofstede dimensions mentioned previously, however, the study did not indicated a or show a correlation between organisational culture and a masculine culture as would be expected in the UK. McCoy, Galletta, & King, (2005) in a peer reviewed journal present evidence from two separate studies, the first study was conducted across the USA and Uruguay, the second was conducted at universities across twenty four countries. The first study was conducted using the Hofstede model and the second used an alternative method and the result where cross correlated. The findings from the studies conclude that over the past thirty years there have been a shift in preferences across nations and the model no longer rings true. McCoy, Galletta, & King state “The use of Hofstede’s country scores, now over 30 years old, can no longer be assumed to be representative of the views of all”. 2….. The effects of variable pay on the firm 2…… The effects of variable pay on motivation 2….. The current best practice approach to financial reward References McKinsey & Company (2012) Lighting the way: Perspectives on the global lighting market: second edition. ZOLTNERS, A.A. 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