Loctite Case Study

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Background US-based Loctite is the market leader in adhesives and sealants business, with Mexico and Permatex as subsidiaries and business operations in Mexico. The net earnings growth has been slowed down since 1987 amid economic downturn, to achieve greater growth, the management control system is being tailored to local environment to better align the behavior of employees with the objectives and strategies of the organization. Performance-based compensation system covers result controls that provide incentives to boost sales and also action controls, particularly behavioral constraints in this case restrict employees’ actions. Issues identified Talent Retainment - Due to the great reduce in tariffs imposed by Mexican government, there appeared significant competitors which not only directly drive away Loctite’s business but also their experienced salespeople. The larger expenses coming along with high quality and services render salespeople a disadvantage when talking to their clients for business. The standards of performance (SOP) set for extra compensation seem unrealistic, with 75% of salespeople earning no commission in the first half of 1992, and so conceivably, fail to motivate them. This makes the result control less effective as they failed to evoke the desired behaviors – achieving sales targets. Together with other offers by competitors, this resulted in high turnover rate. Profit Sharing - Result controls may serve well with congruence between employees’ and company’s objectives, but employees take for granted the law-required 10% profit sharing of the company’s income and so their motivational effect seems little. Salary Increase – The semi-annually salary increase is subjective and irreversible, and so may be inconsistent with performance and fails to motivate employees to work harder. Internal competition – Although assigned the

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