LOCTITE COMPANY DE MEXICO, S.A. de C.V.

Loctite Corporation US based specialty chemical company Dominant market share  85% in 1992 In 1992, 2 main lines of products: sealants and adhesive products, for manufacturing and repairs Organized into 4 geographical groups: North America, Europe, Latin America and Asia/Pacific

Loctite’s strengths « Diversity without diversification » geographic end use markets product usage product diversity  All these elements helped Loctite continue to grow during difficult economic times Rapid growth of the Mexican subsidiary $3.1 million of sales in 1987, $9 million in 1992 Expected annual growth of 15% in sales and 20% in profits

Loctite’s Mexican subsidiary 119 employees, functional organization The sales force is assigned to territories Prices are set by Jose Monteiro Very specific sales approach

Loctite de México’s difficulties Specificities of the Mexican market Strong decrease in prices in Mexico because of a deflation  national turnover decreases Costs increase four times as fast as the peso’s devaluation relative to the dollar Increase in competition in Mexico with lower prices than Loctite Huge increase in the competition for labor

Internal problem: compensation According to José, “one of the most difficult management areas in Mexico is compensation” “If you want to grow, you must compensate your people appropriately” José’s problems High compensation levels compared to competition, yet high turnover  wage perception problem Competition among salespeople in Mexico City territories

A complex compensation system Compensation is dependent on performance  employees are eligible for company profit sharing and semi-annual salary increases Employees’ superiors decide subjectively the bases for employees’ salary increases Salespeople and managers have commissions based on individual performance Different compensation incentive plans for salespeople, sales managers, first-line managers and the general manager

Different compensation plans Salespeople Sales managers Commission on sales Based on sales growth and not gross margin Paid on bi-monthly basis No seasonal adjustments Objective = encourage high value-added sales Based on sales growth Paid on quarterly basis Lower marginal rates of payment than for salespeople Could represent 60% to 80% of their salary Commission on house account sales Sales for large OEM accounts, lower commissions to reflect lack of control of salespeople over these sales New orders Extra commission for first orders from new customers (one to which no sales in the last 6 months) Achievement of SOP targets Standards of performance ratings averaged 75-80% of maximum Average salesperson SOP bonus = 2/3 of one month salary Average sales manager SOP rating = above 90% Problem = economic slowdown so 75% of the salespeople earned no commission in the first half of 1992

Different compensation plans For First-line managers: based on performance in SOP areas SOP objectives are weighted For the General Manager: Bonus depends on achievement of performance (sales and profit) and financial goals. Can earn up to 40% of his salary. Stock options if subsidiary’s performance exceeds the plan by a substantial margin

The issue of competition in sales territories Mexico City area divided into 4 small territories, to which salespeople are assigned Territories no longer respected Competitors are less expensive so less customers Competition among salespeople and between salespeople and distributors, who have no territories  Sales efforts therefore duplicated 3 000 potential clients in Mexico

Constraints of the Mexican market which need to be taken into account All Mexican companies must distribute 10% of their pretax income to employees based on worked days and earnings Mexico is not a mature market so you must think on a short-term basis to calculate rewards Competition for skilled labor is very tough

Key problems and possible solutions For each type of sales activity, objectives are set in growth of volume  set objectives in growth percentage, taking into account the estimated 15% annual growth in sales Territory problem 3000 potential customers in Mexico  assign some salespeople exclusively to potential customers, to compensate for the lack of growth on existing customers Assign salespeople to customers, not to territories

Key problems and possible solutions Turnover problem Create incentive plan which rewards loyalty to the company Will help develop long-term relationships with customers, which is more individually rewarding for salespeople (OB) Controllability problem  salespeople are not responsible for economic slowdowns or the devaluation of the peso, yet these deeply affect their ability to sell, and therefore their bonuses take economic slowdowns into account when fixing sales objectives

Key problems and possible solutions