College of Business Administration

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[original EMBA case]

Medical Device Commission Structure

Sales for the devices were compensated through a commission program and both the sales representatives and upper the management received compensation. The compensation program paid a percentage of revenue for incremental sales. The situation involved either a decision that could result in a negative impact on the commissions or one that could benefit the hospital by positively enhancing their financial position.

It is customary for hospitals to be members of group purchase organizations (GPO) to take advantage of purchase discounts. As a member of a GPO the subject hospital had as part of their agreement a vendor rebate program. As the preferred vendor, the medical device company agreed to rebate the hospital with free product based on a percentage of overall sales. The rebate was to be paid out semi annually and was to be monitored and enforced by the hospital and the vendor.

After three years in to the contract, the sales team discovered that the rebate program was never enforced. Both the representative and the manager inherited this account and therefore were not aware that this oversight had been occurring. When researching the agreement further it was determined that, the unpaid rebates were more than $250K. Due to the unusually high value of rebate product, the amount of lost commissions for the representative would be significant. In addition, both the immediate manager and the next reporting level would be impacted.

At the same time the hospital had not inquired about the rebate product and did not appear to be aware of the details of the program. Although some of the same individuals from the hospital that were originally involved when the contract was signed were still active, they seemed to overlook this portion of the contract.

Due to the financial significance of this situation, management had to choose whether to continue ignoring this situation or present the details to upper management with a recommendation. Ultimately local management brought it to the attention of the upper management and suggested that a creative solution be developed to protect all at risk. The response from upper management was to remain silent since the customer had not discovered the mistake.

Moral Dilemma - Faced with a difficult situation that could cause the representative undue financial burden or negatively expose the corporation to its accounts, the local management brought the issue to the attention of upper management.

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