Rothwell Inc. is the leader in computer-integrated manufacturing and factory automation products and services. The Rothwell product offering is segmented into 15 product categories, based on product function and primary manufacturing location.
Rothwell's sales division sells all 15 product categories and is composed of 25 district offices located throughout the United States. The company is highly decentralized, with district offices responsible for setting sales price, product mix, and other variables.
District offices are rewarded based on sales. Some large customers have plants in more than one of Rothwell's sales districts. In cases where sales are made to these customers, the district offices participate jointly and sales credits are shared by each district involved.
The sales division compensation plan designed by L. L. Rothwell, founder of the firm, was structured so that the staff would pursue sales in each of the 15 product categories. The selling program has the following features:
Over the past three years, Rothwell generated exceptionally high sales-and awarded record bonuses. Profits, however, were lackluster. L. L. was befuddled!
This scheme ignores selling costs and contribution margin. While sales people cannot control the production costs of the products, they are able to control which products they sell.
Since all originations that can be packaged and sold increase the originator's revenue there is an incentive to originate as much as possible. This includes finding ways to lend to folks who can't pay.
Loans that are likely to default are called subprime loans.