The sales-force compensation practices at Nordstrom had been used for over 20 years without previous complaints, so what caused the current problems and how can Nordstrom explain this to “60 Minutes” and the “60 Minutes” audience.
Does incentive pay work? According to BSZ (page 432) critics of incentive pay rely on two arguments. The first is that money does not motivate employees. The second, and more prominent criticism is that it is difficult (if not impossible) to design an effective incentive compensation plan. Overall, incentive plans have survived for a long period of time in the marketplace and this suggests that the ultimate benefits outweigh the cost.
Incentive problems exist because of conflicts of interest between employers and employees. In the case of Nordstrom’s, its management philosophy is to allow local Managers to apply specific knowledge to operate stores. Nordstrom’s philosophy allows local Managers to buy product and stock stores based upon the trend within a certain area in an effort to extract higher profits by differentiating product lines versus offering standard lines that would appeal to broad markets. These local Managers are said to “run the store as it was their own business.” With Nordstrom’s explosive growth rate, from 5,000 to over 30,000 employees within an extremely short duration of time, Executive Management did not have visibility into the day-to-day operations as it once had when stores were only localize to the Seattle area.
Although the intentions of the incentive plan in question were good, in fact it allowed Nordstrom’s...