The Crimson Press Curriculum Center

First Page and the Assignment Questions:
We had been operating our company like a family, but maybe we're too big to operate that way. I think some of our people have gotten lazy, and our performance has suffered. That is why I asked for the design of a new incentive compensation plan. We need to be more competitive to survive. I want our people to focus on what they can do to improve company performance, and if we're successful, I am quite willing to share a good proportion of the proceeds of our success.

—Fernando Gonzalez, Chairman and CEO, Las Ferreterías de México, S.A. de C.V.

THE COMPANY
Las Ferreterías de México, S.A. de C.V. (Ferreterías) was the second largest retailer of lumber, building materials, and home improvement products and equipment in Mexico. Ferreterías operated 82 stores in Mexico City and throughout most of the northern regions of Mexico. Each of Ferreterías' stores offered between 10,000 to 20,000 stock keeping units (SKUs) in a retail sales area, an outside lumberyard area, and a garden center. The total store areas ranged from 10,000 to 35,000 square feet.

Ferreterías was founded in 1902 in a suburb of Mexico City by Fernando Gonzalez' grandfather. Over the years, the company added more locations. It was listed on the Mexican Stock Exchange in 1983. In 2002, Ferreterías had sales of 2,210 million pesos and profits of almost 120 million pesos (see summary financial statements in Exhibits 1 and 2).1

Starting in the late 1980s, Fernando Gonzales launched a major company expansion to take advantage of the growth in the Mexican economy. He thought that his company needed to emulate the methods of the large American homebuilding retailers, such as Home Depot and Lowe's, in order to survive. Thus, improving market share and improving operating efficiencies became Ferreterías' strategic priorities.

The store managers enjoyed considerable autonomy. They were responsible for hiring, firing, and supervising their store's personnel. While the stores had the same architectural designs and some basic stock keeping requirements, the individual store managers were allowed to adapt their merchandise offerings, their inventory levels, and their advertising and promotional activities to their local markets, which were quite diverse. The store managers were given considerable latitude to reduce prices to move excess inventory or to meet competition. They were responsible for making credit-granting decisions, although for large accounts they were expected to ask finance personnel at headquarters to perform a credit check. And some aggressive store managers tried to generate new business by calling on prospective customers themselves.

Assignment
1. Evaluate the proposed bonus plan that Mr. Gonzalez is considering.
2. How, if at all, would you modify the proposed plan?