Mary Kay

9 September 2016

The program, which originally awarded the use of compact size Oldsmobile Firenzas to eligible beauty consultants, was modeled after the company’s acclaimed pink Cadillac program, introduced in 1969, for which only director-level consultants were eligible. The pink Buick program, Mary Kay’s third program, was also reserved for sales directors, but was based on less difficult performance criteria than the Cadillac program.

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Under all three car programs, Mary Kay awarded the use of a new car to eligible beauty consultants who sustained the required sales and recruiting levels for the designated number of months. Winners maintained the use of their cars for two years as long as they continued to meet the required sales volumes on a monthly basis. The company bore all the costs associated with leasing the new General Motors cars from ARI Leasing, insuring the cars, and then selling the used ones as consultants returned them. No

The car programs had proven to be very effective motivators, helping company sales through a period of market stagnancy in the mid1980s. Over time, however, the cost of running the programs had escalated substantially. The cost of the VIP program in particular had skyrocketed in the late 1980s, with the number of leased cars approaching 3,000 in early 1989. In addition, there were approximately 1,000 Cadillacs and 1,000 Buicks in force in 1989.

The number of car winners as a percentage of the total number of beauty consultants had doubled from 1.25% in 1986 to 2. 5% by yearend 1988. Do Mary Kay’s management now faced the difficult challenge of containing further program cost increases without upsetting the powerful incentive system that was the firm’s primary source of growth and success. In addition to reducing total car program costs (especially VIP costs) as a percentage of sales, management was interested in redirecting the dollars behind other elements of its incentive compensation plan for greater cost effectiveness.

Also, management wanted to provide reward and recognition for a range of performance levels that was broad enough to meet the varying career interests of current and prospective beauty consultants. Hilary Weston prepared this case under the supervision of Professor Robert Simons as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright.

Mary Kay Cosmetics Inc. was an international manufacturer and distributor of premium skin care, hair care, and body care products. Mary Kay products were not available through retail stores. In 1988, its products were sold throughout the United States exclusively by a network of over 175,000 independent (self-employed) women who ranged in status from beauty consultants to national sales directors. (Mary Kay also sold internationally in seven countries. ) This sales force met directly with customers in their homes and offices to demonstrate and sell Mary Kay products.

The firm’s 1,436 company employees worked out of its Dallas headquarters and manufacturing facility and its five regional distribution centers. In 1988, the company’s 25th anniversary, Mary Kay Cosmetics achieved record sales of $406 million, up 26% from $326 million in 1987. The original mission of company founder Mary Kay Ash had been to be a “teachingoriented” organization that provided women with exceptional opportunities for professional achievement, economic success, recognition, personal development, and independence.

The organization had remained true to this goal, but had expanded its mission during the 1980s to include greater emphasis on consumer needs, product innovation, and quality. As revised in 1987, the Mary Kay Mission was “To achieve preeminence in the manufacturing, distribution and marketing of personal care products by providing personalized service, value, convenience and innovative solutions to consumer needs through our independent sales force. ” Company Philosophy The “Consultant’s Guide” book provided to new beauty consultants stated the firm’s philosophy as follows: tC

From the beginning, the Company has grown based upon the same philosophy: every person associated with the Company, from Chairman Emeritus to the newest recruit, lives by the Golden Rule, “Do unto others as you would have them do unto you” and the priorities of God first, family second, and career third. In describing the company’s commitment to the independent sales force, Chairman Rogers asserted, “Every aspect of the Mary Kay system is aimed at promoting a successful career for the beauty consultants. It’s through her succeeding that we all succeed.

We’re committed to total customer satisfaction; and to the customer, a beauty consultant is Mary Kay. ” No A director of sales development explained the relationship between the company and its sales force: There are five things that all consultants seek. We refer to them as STORM: Satisfaction with a task well done (self-worth); Teamwork (a sense of belonging); Opportunity (to succeed); Recognition; and Money. These five needs are being met through various aspects of our business. Do Company Ownership and Structure

In 1984, after several years of extraordinary growth, a decline of 14% in sales and 8% in earnings had triggered a sharp drop in the corporation’s share price. In December 1985, in response to both the depressed share price and to their own desire to manage for the long term rather than for quarterly earnings, Chairman Mary Kay and her son, Richard Rogers (president and CEO at the time), led a management leveraged buyout for a price of approximately $315 million. Mary Kay and Richard also wished to avoid the impact that public financial reporting could have on sales force 2

This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. Mary Kay Cosmetics: Sales Force Incentives (A) 190-103 op yo rP os t attitudes during a sales and stock price decline. Negative attitudes could easily trigger further sales and recruiting declines. Two years later, in November 1987, Mary Kay assumed the title of chairman emeritus and Rogers, 44, became chairman (retaining his title as CEO).

Dick Bartlett, former executive vice president of Marketing, was named president and chief operating officer (COO). Mary Kay management prided itself on its lean internal staff. President Bartlett placed himself at the bottom of the organization, surrounded by staff support functions. Above him were the four operating divisions—Marketing, Sales, R&D/Manufacturing, and Distribution—which “served” the sales force. Bartlett placed Mary Kay’s customer base of 15 to 20 million households at the top of the organizational structure.

Bartlett explained the role of his internal organization and how it operated: Our goal is to support the independent sales force of 175,000 beauty consultants, because our sales force is our lifeblood. Our job in supporting the consultants involves a continual effort to update and improve the quality and selection of our products and to refine our facilities and procedures.

We also have to anticipate and respond to the consultants’ needs. This all requires creativity and flexibility. tC One of my first challenges as president was to break down departmental fiefdoms. I instituted three types of meetings that bring together managers from different departments. The weekly Sales and Marketing meetings are religiously attended by top management. I never miss those meetings. They’re where the hot topics are raised and discussed. We’ve also created what we call “CATS”—Creative Action Teams.

These cross-functional temporary task forces are formed on an ad hoc basis whenever any employees identify a specific problem or opportunity which they think they can take on, especially those affecting quality improvement. The purpose of the CATS is to nurture creativity and keep the organization flexible. We track the progress of all CAT projects at our weekly meetings, and employees are usually recognized for successful completion. The main personal link between the company and the sales force was the group of six regional sales development directors.

One of them described his role: Do No The job of the six of us is to bridge the gap between the growing sales organization and the company. We picture ourselves as their voice internally. Each of us covers a geographic region containing 700 to 800 sales directors and 30,000 to 40,000 beauty consultants. We wear a lot of hats—information conduit, administrator, motivator, personal and financial advisor, and so on. Also, there’s an expectation on the part of each consultant that their own personal considerations will be taken into account.

Let’s say a woman works all year and misses a director’s goal by $18, we’d destroy her if we didn’t give her a break. We need to be flexible, so we make those kinds of calls. Sales Force Support In addition to personal contact with the field, Mary Kay Cosmetics employed an elaborate set of tools and programs designed to motivate, recognize, and develop its beauty consultants: Communications The company produced a constant flow of written material for the sales force, including a monthly magazine, weekly newsletters, training manuals, and product brochures.

It also 3 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 190-103 Mary Kay Cosmetics: Sales Force Incentives (A) op yo rP os t provided video and audiocassettes (for recruiting, training, and motivating), promotional sales aids, and a telephone hot line for advice and answers. Mary Kay also regularly solicited feedback from consultants and customers by conducting surveys and focus groups.

The company used this information to improve existing products and packaging and to develop new products and selling tactics. Events Mary Kay sponsored a variety of contests, conferences, and other events for the consultants, which combined all three elements mentioned above—motivation, recognition, and education. The biggest event was the annual seminar, which in 1988 was attended by 25,000 consultants. (The three-day event was divided into four back-to-back identical sessions because of its sheer size.

The seminar was open to all consultants and directors; however, registrants paid their own way to attend and participate in the festivities and training sessions. The climax was a gala awards night in which consultants of all levels were honored and rewarded for their achievements before an applauding crowd of thousands. Rewards ranged from ribbons, jewelry, furs, and luxury trips to the crowning of “queens. ” Sale force activities Ongoing support within the beauty consultant networks was another important ingredient in the Mary Kay formula for direct selling.

Despite the high level of company support, the vast majority of a consultant’s interaction was with her unit director and the other 30 to 150 consultants in her unit, and not directly with Mary Kay management, which had no formal control over the sales force. 1 tC Because Mary Kay Ash believed that people could be “praised to success,” the company fostered a sale force culture based on positive reinforcement and recognition. This was achieved through several means. First, the company did no sales force recruiting; the independent consultants personally chose their own new recruits.

This personalized approach increased the likelihood of successful director-consultant relationships. Also, the company provided guidelines to assist the independent sales force in motivating and training its members. For example, the companysuggested Monday unit meetings were the primary forum for the sharing of product information, selling tips, and success stories, as well as group praise. These weekly unit meetings not only served as a support group and training class, but also created peer pressure to succeed.

In “Memo,” the company’s weekly newsletter to directors, and in the Director’s Guide, the company provided directors with many kinds of creative tips and tools for training and developing their units and conducting effective meetings. Do No Recognition and prizes The majority of beauty consultants did not attend the annual seminar or receive cars and other large prizes. All active consultants, however, were motivated to increase their sales and recruiting by a constantly available array of prizes and recognition for incremental progress.

Company-sponsored gifts and prizes were offered for achieving sales and recruiting goals and winners’ names were listed in Applause, Mary Kay’s monthly magazine for consultants. In addition, directors, at their own expense and discretion, rewarded their unit members for achieving various milestones. The gifts and prizes handed out by directors to beauty consultants usually took the form of jewelry and other accessories, often with the Mary Kay logo on them, and were usually awarded in front of a group. (Exhibit 3 lists a representative sampling of the type and cost of directors’ gifts to unit members.

For example, upon signing up her first recruit, each consultant received a string of imitation pearls and congratulatory applause at her unit’s weekly meeting. At each step in her Mary Kay career, a consultant received additional recognition and status symbols, including “ladder” pins with varying numbers and types of gems, which indicated her level of 1The signed agreement between an independent beauty consultant and the company stipulated certain basic guidelines that the consultant was required to follow, such as her legal responsibility to represent the company and its products honestly and accurately.

Mary Kay Cosmetics, however, had virtually no management control over the independent contractor sales force. 4 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. Mary Kay Cosmetics: Sales Force Incentives (A) 190-103 op yo rP os t achievement. (See Exhibit 4 for the hierarchy of nonfinancial sales force incentives.

Senior Vice President of Sales Bart Bartolacci described the role of recognition as an incentive: As Mary Kay herself would say, “A $5 ribbon plus $20 worth of recognition is worth more than a $25 prize. ” In other words, give them a check, but give it to them on stage. Then they will really respond. I would never take away the recognition element. It would be like putting my head on a chopping block. Some of the women really don’t need the money at all, but the recognition is addictive. In fact, the top people in our sales organization motivate their units through recognition, not expensive prizes.

Financial incentives The financial incentives, however, were also considered an indispensable ingredient in the firm’s direct selling strategy. According to management, the power and appeal of Mary Kay’s incentive system were rooted in the carefully designed combination of compensation, advancement opportunity, prize incentives, and recognition. According to the Mary Kay Marketing Plan (i. e. , the incentive compensation and advancement plan), a consultant’s income was determined by a very clear and objective method, based on her selling and recruiting activity.

No organizational constraints limited the pace at which a consultant could advance her status and increase her income. In 1988, the highest paid sales director earned over $400,000 and roughly 90 others had six-figure incomes. The company, via its beauty consultants, aggressively advertised the Marketing Plan’s objectivity and unlimited earning potential to attract new recruits. The specific components of the plan were based on the following premise, as explained by Sales Group Executive Vice President Barbara Beasley: tC

There are three things we want beauty consultants to do: order products, sell products to customers, and recruit new consultants. Recruiting is really the big source of growth because sales per consultant can rise only so much. That puts a limit on both company growth and consultants’ earning potential. Moreover, because approximately 70% of consultants drop out each year, we need new recruits just to maintain sales. We currently recruit about 10,000 consultants per month and lose 7,000 per month. I know that turnover rate sounds high.

But, in fact, our rate is the lowest in the direct-selling industry, and lower than most retailers’ sales staff turnover. No But a good director must sell as well as recruit. Her best source of new recruits is her customer base. Also, her role as leader, teacher, and motivator involves setting an example for her unit members. We also need the sales directors to stay on top of customers’ needs and their reactions to new products because the directors are our strongest tie to the marketplace. Do Although all consultants fell into one of two general categories, nondirectors and directors, there were multiple titles within each group.

The financial success of the more senior consultants and of directors depended heavily on their ability to recruit new consultants and on the ongoing performance of their recruits. Exhibit 5 summarizes the compensation for all levels as described below. An entry-level beauty consultant’s income was the difference between the retail value of the products she sold and the wholesale price (usually 50% of suggested retail) at which she bought 5 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright.

[email protected] harvard. edu or 617. 783. 7860. 190-103 Mary Kay Cosmetics: Sales Force Incentives (A) op yo rP os t products from Mary Kay. A nondirector consultant also received a 4% to 12% commission2 on the sales of all her personal recruits. Once she had at least five recruits, her title became Team Leader and she could try to qualify for the use of a VIP car. In order to win the use of a VIP car (a red Pontiac Grand Am) and keep it for the entire awarded period of 24 months, a consultant had to reach and maintain three types of targets over that period: (1) team monthly production volume (i. e., wholesale value of all her recruits’ orders); (2) personal monthly wholesale production; and (3) number of active recruits.

Each VIP consultant was given a fixed “allowance” she could draw on to make up for shortages in particular months, so that she would not have to relinquish her car because of one or two bad months. The allowance could be increased (and thereby “banked”) by performance above the minimum requirements in any given month. Once a consultant became a sales director (the qualifications were again tied to personal and team production and number of recruits), several additional avenues of income opened up to her.

In addition to receiving an 8% to 12% commission on her personal recruits’ wholesale orders, she received a 9% to 13% commission on the production of the entire unit she directed, which included her recruits’ recruits. In addition, she received a sliding-scale monthly bonus of $400 to $2,500 if her unit’s total monthly production exceeded $4,000. Thus, if a director’s unit achieved the $4,000 threshold, the compensation system rewarded her doubly for the unit’s performance. Finally, a director also received a $100 to $400 bonus for each month in which her unit of consultants recruited at least three new active consultants.

As soon as one of a director’s unit members became a director herself, the former became a senior sales director. In addition to the sources of director compensation, senior directors also received a 4% commission on the monthly production of all their “offspring” units. If they had eight or more offspring units, the commission increased to 5%. tC A national sales director—the highest position in the Mary Kay independent sales force—did not directly work with nondirector beauty consultants. Her compensation was based on the wholesale production of both her first-line and second-line offspring units.

She received a commission of 5% to 8% and 2%, respectively, for the two tiers of units. History of the VIP Car Program No Between 1983 and 1989, Mary Kay’s car programs increased from a base of 1,100 cars on the road to over 5,000 cars. Most of this increase was due to the VIP program, which was introduced in 1984. By mid-1989, VIP cars in force numbered 3,000. The number of VIP car winners had grown rapidly despite increases in program qualification requirements in 1986, 1988, and 1989. Increased VIP participation was accompanied by several external cost trends: The costs to Mary Kay of leasing the cars had increased with interest rates.

Automobile insurance premiums had escalated faster than both inflation and prices of Mary Kay products. Do • • General Motors discontinued the Oldsmobile Firenza, reducing the resale value of the one- and two-year-old cars. 2Commissions were based on wholesale orders and the percentage level depended on the number of recruits a consultant had. 6 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. Mary Kay Cosmetics: Sales Force Incentives (A) 190-103

The Current Challenge op yo rP os t All of these trends had contributed in driving up the cost of the VIP program. The cost increase was further magnified by the decline in car “tenure”: an increasing proportion of the consultants who had qualified for VIP cars were unable to maintain the required sales and recruiting levels for the 24month period. As a result, Mary Kay often was forced to reclaim cars that were substantially less than two years old. The newer a car when Mary Kay reclaimed it from a consultant, the greater the disparity between the car’s unamortized book value and the (much lower) resale price that Mary Kay received for it.

In short, the company absorbed larger losses on cars that were in service for shorter periods of time. Mary Kay’s top management was seeking a broad solution to the rising costs—and corresponding diminishing returns—of its incentive plan, the VIP car program in particular. According to Richard Wiser, vice president of Financial Planning and Analysis: Over the last several years, we’ve watched the cost of the car programs and of commissions creep up relative to sales. [See Exhibits 6 and 7. ] Car expenses in particular have really jumped up since 1985. In the past, we’ve always gone for incremental cost savings.

We took a negative approach: we simply raised the program qualification requirements when we wanted to reduce the cost of the program. Now, we want to be more creative. We have Finance, Marketing, and Sales all working together to identify innovations that would save money for us but, at the same time, keep the sales force morale up and boost the effectiveness of the incentives. tC We haven’t been getting a bang for our buck from all VIP consultants. Unless they are trying to qualify for directorship, many feel no motivation to increase their sales and recruiting efforts above the level needed to maintain the use of their cars.

We’re not tapping their full potential because we’re not rewarding them for achieving it. President Dick Bartlett continued: No Richard is right. In fact, those VIP consultants who really do want additional income and recognition may rush into directorship prematurely. They may qualify before they have a large, strong team base and sufficient experience. That’s bad for everyone. The consultant must fight a frustrating uphill battle to retain her director status. And from our perspective, her unit’s size and performance may deteriorate. A weak director hurts unit morale and development.

The problem trickles down: when a weak or negligent consultant loses a customer, it’s a lost sale for Mary Kay. Customers can’t buy our products in retail stores and the customer is not likely to seek out another consultant. Do Bartlett and his management team summarized the objectives of the Marketing Plan modifications they sought: • To improve profit margins by reducing overall beauty consultant compensation (particularly the costs associated with the car programs) as a percent of sales—a ratio that had been escalating yearly. • To enhance the beauty consultants’ career path with more distinct milestones and forms of reward.

Bartlett was particularly concerned about two issues that had adversely affected many top-performing VIPs: 7 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. 190-103 Mary Kay Cosmetics: Sales Force Incentives (A) op yo rP os t 1. Many had worked extra hard to achieve director status but were ill-prepared for the extra demands of continuing director-level performance.

Many had stagnated at a “maintenance” sales level simply to retain their VIP cars. • To make cost reductions elsewhere in the Marketing Plan while preserving sales force morale and motivation. • To minimize the cost to the firm of maintaining low-performing consultants, i. e. , those with very few recruits and no indication of ambitious growth goals. At the conclusion of their interview with the casewriters, the managers reemphasized the extreme sensitivity of beauty consultants’ actions to changes in the Marketing Plan.

They cited an example: in 1984, an announced increase in VIP qualification criteria resulted in an enormous “rush” for VIP status before the effective date of the program change. As a result, the number of VIP car winners temporarily increased dramatically, rather than tapering off as intended. (Refer to Exhibit 6. ) Moreover, many of those consultants who had rushed to obtain cars had relatively low tenure with Mary Kay. So, they did not have the experience and team strength to maintain their VIP status. As a result, they had to forfeit their cars prematurely, which was demoralizing for them and costly for the firm.

Do No tC In general, any change in the Marketing Plan that was not well-received by the sales force of over 175,000 beauty consultants could be disastrous to the company: not only would sales drop off in the near term, but the sales force attrition rate could increase and the recruiting rate decrease over the long term. Aware of this danger, management had scheduled the first “Mary Kay Summit Meeting” and invited all national sales directors (the top of the independent sales organization) to be involved in designing changes in the Marketing Plan.

Management wanted to bring to the Summit Meeting their own draft plan as a starting point for discussions with the national sales directors. 8 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013. Copying or posting is an infringement of copyright. [email protected] harvard. edu or 617. 783. 7860. Mary Kay Cosmetics: Sales Force Incentives (A) op yo rP os t Mary Kay Organizational Structure Do No tC Exhibit 1 190-103 9 This document is authorized for use only by Hamid Akbari at University of Ontario Institute of Technology until October 2013.

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