Loctite De Mexico

EXECUTIVE SUMMARY

This report details the result of the analysis carried out during November 1992 in order to assess the Loctite de Mexico's compensation system.

The aim of the analysis is giving some insights that would enable the company to improve its system and deal with some issues related to the specific environment it works in and to the peculiarities of the company itself.

Recommendations are inter alia raised in accordance with the relevant management control theories:

- Result controls: results controls are extremely important in this case as they can be particularly effective in addressing motivational problems and encourage employee to produce the results the company desires.

- Action controls: in supplement to the result controls, action controls will also help to ensure that employees act in the company's best interest by making their actions themselves the focus of control.

- Cultural controls: cultural controls focus on organizational behavioural norms and on encouraging employees to monitor and influence each other's behaviours.

1. Introduction

Loctite México was founded in 1958 and was acquired by Loctite in 1973. The actual organizational structure reflects the way it grew. It was initially founded as a sealant distributor for Permatex and later established the Industrial production in 1978.

In 1992 the company is small with its sales still growing although not as rapidly as in the past few years.

2. As is situation of the company and findings

a). Unique aspects of the Mexican environment

The Mexican country peculiarities:

 The costs were increasing faster than the peso's devaluation relative to the dollar.

 The lowering of tariffs due to the President's plan to bring down inflation and bring investment to the country to enable Mexico to compete globally caused a notable increase in foreign competition.

 Remarkable increase in the competition for skilled labour and bilingual employees causes high turnover in the company's staff.

 Mexico has a less mature market than the U.S. and sales were starting to slow down. The sales increased only 1% in 1991 comparing to 17% increase in 1990

 Different compensation packages offered according to industry/company: some are based on salary, some on salary and commissions, with or without fringe benefits.

b). Unique aspects of the Mexican subsidiary

The unique aspects of the Mexican subsidiary are also to be taken into consideration for the redesign to be successful. They can be summarized as follows:

 Salespeople are assigned to four different areas in the Mexico City territory

 Distributors are "free" of boundaries, i. e. they can sell anywhere without restriction

 High turnover of salespeople, particularly in Industrial sales

 Cost accounting system not as advanced as in the other US subsidiaries

 Most of the employees are Mexican and an issue of cultural difference versus U.S. headquarter might arise because of that

 Peculiarities of the sales function

At Loctite de México's the sales function consists of two different areas with two line managers responsible for products (rather than territories): Industrial and Permatex. This is due to the company's historically emerged structure.

In both, salespeople are assigned to territories with the same sales potential in terms of volume and in both salespeople are not given any pricing authority (since prices are directly decided by the Managing Director).

Others than that they are completely different not only in terms of market served but also in terms of sales approach used.

Regarding the markets served, the Industrial function is split into Original Equipment Manufacturing (OEM) and Industrial Maintenance Repair Overhaul (MRO), whereas the Permatex function just refers to the Permatex market.

Industrial sells either through direct sales to OEM users or through distributors to MRO users.

On one hand sales to OEM users are characterized by a long sales cycle, which stresses the importance of the sales force as provider of customized solutions to the customers and the need of putting in place follow up activities to bring the contract to an end.

On the other hand, sales to MRO users are immediately closed during in-plant maintenance seminars.

Permatex instead applies to a combination of the two approaches in use within the Industrial function: in fact it makes direct sales to distributors and retailers which are agreed on immediately through direct calls.

c). Loctite de México's compensation system

Loctite's Compensation system is based on three performance-dependent pillars: Profit sharing, salary increases and variable compensation.

Profit sharing and salary increases apply to all the employees whereas variable compensation is granted only to salespeople and management based on their performance.

PROFIT SHARING is a part of the compensation which is required by law, account for maximum the salespeople base salary and therefore it is taken for granted by employees, not leading to superior performance.

SALARY INCREASES have been set according to a thorough investigation conducted with the help of another consulting firm with the aim of identifying the most competitive package offered in the Mexican market to retain people. Therefore increases are determined semi-annually by direct superiors and are set above the inflation. Besides salary increases there is an implicit part of salary which emerge once the salespeople are hired outside: training. In fact salespeople are particularly requested by competitors due to the high level of training they are subject to. Notwithstanding these elements of the compensation it seems that turnover remains particularly high within the company and represents an issue which affects the level of sales.

INCENTIVE COMPENSATION PLANS are paid only to salesforce and managers according to their performance either in the form of commissions/bonuses or in the form of payments on standards of performance (SOP).