Early Retirement Dilemma
In 1985 Baxter acquired American Hospital Supply. It immediately initiated integration efforts, but after four years it was missing profitability targets. In particular, headcount was high. In 1990 Baxter modified its pension plan, which made early retirement more attractive to long-service employees. A shocking number of medium- and long-tenure salespeople declared their intent to take early retirement. It was anticipated that Baxter would lose significant profits if these these senior salespeople retired. I was asked to avert high turnover in the sales force, and simultaneously help Baxter reach its profitability targets.
Baxter’s compensation cost of sales was found to be competitive: the ratio of pay per person to sales per person was close to industry standards. So, a simple pay increase would inflate Baxter’s cost structure. But tremendous profit opportunities existed: many accounts did not buy Baxter’s high margin products. Indeed, the sales compensation plan emphasized volume rather than profits, even though account profitability had been reported for years. While management was interested in converting to a profit-based plan, high turnover would reduce, not increase profits.
Extensive modeling revealed that it was possible to shift to a profit-based compensation plan using a transition program. A threshold level of prior-year pay would be protected, and territory profit gains would be shared with salespeople. In effect, salespeople could earn significant pay increases by selling higher margin products.
Human resources staff confidentially examined the modeling results and concluded that their early retirement concerns were addressed. Field sales management was called in to review the modeling results, and they too were enthusiastic. So, the plan was announced to salespeople through a national meeting. While responses seemed positive, tensions were high.
That evening while on a flight to another client, I was surprised to overhear three Baxter salespeople in the row immediately behind me. They were discussing the new compensation plan in detail. They had account sales reports spread out on their tray tables, along with notepads and calculators. They were whispering advice to each other on how to increase account profits and pay. It was a long flight, and while most cabin lights were off, theirs remained on.
After the first quarter on the new plan, Baxter profits increased significantly, sales force pay levels increased, and there was very little field turnover.