HBS: Compensation and Performance Evaluation at Arrow Electronics

March 7, 2010

I found the case above to be very interesting as it presents the controversy again about the use of employee performance review EPR and compensation systems at Arrow, whether they should get rid of them, such flawed systems that we certainly know promote nothing but an atmosphere of intimidation and manipulation between boss and subordinate, as a result team morale is truly affected due to the loss of trust, and so is productivity. We have been discussing about these compensation and EPR topics in class. However, my question still remains the same: how can employees be truly evaluated by the same parameter when we know that everyone is different? Well, this case starts off pretty much like the previous ones we have studied; however it develops some interesting dynamics that makes Arrow’s flawed EPR and compensation systems one-of-a-kind:    

  • Background: Arrow was founded in 1935 as a retailer of radio equipment. From its inception Arrow showed leadership in the electronics industry by adapting its strategy as the electronics industry changed. Its products range from radios, transistors, microprocessors, to medical instruments, to computers, to semiconductors. In 1995 Arrow became the world’s largest distributor of electronic components and computer products with sales of $6 billion operating in North America, Europe, and Asia/Pacific regions. The head-quarters are located in Melville, NY.        
  • CEO: Steve Kaufman- respected and charismatic. His role is to execute the company’s strategy. His responsibility is to guide the strategy of the company, and to ensure that it is carried out properly. His major concern is getting the right people in the right slots and motivating them. The rest is just mechanics for him: that is budget reviews; capital expenditure reviews, resource allocation, mindless staff, and committee meetings.
  • Competitive advantage: is his people.
  • Sales force: very large sales force, marketing team, and purchasing team. CEO Recruited young college-educated people named “idiots right out of college”, trained them for 26 weeks, and then put them to work. So early on the way these new sales reps started to compare their salaries to older sales people’s that have been working at Arrow for 10 to 15 years; that originated a system of inequity that brought in nothing but jealousy and unhealthy relationships among the sales people.
  • Loyalty: came from pay (promises of money and promotions), so this is CEO’s greatest mistake as he prepared his salespeople so well that they became incredibly marketable and easy to jump into different jobs in different companies by being simply offered higher pays. So the turnover at Arrow is extremely high- a sales rep works for the company over a four year span, and then moves on.  
  • Motivation: is extremely driven by pay (which is natural in the sales industry- bonuses and commissions). So Kaufman did create this condition of extrinsic motivation on his sales force instead of instilling a teamwork spirit which eventually will encourage salespeople make intrinsic motivation a personal choice, and with that save tons of money by retaining his employees.
  • Single loop learning: is clearly exhibited on CEO’s inability to change the flawed system in place that is judging people by numbers and not by their behavior; not separating pay and EPR, not hiring job hoppers, and the worse, adopting a condescending attitude “the ruler”.
  • Customers: IBM, Intel, Motorola, HP, among others; to me they all should feel some kind of strain due to the lack of establishing long-term business relationships between them and Arrow’s salespeople which is attributable to Arrow’s high turnover.

This is a great example of a company that nurtured nothing on its sales force but a stupid system based on compensation and employee performance evaluation at Arrow Electronics – money (cash, bonuses, commissions). The good thing is that Arrow’s CEO Kaufman notices this system does not work so he calls for a job redesign.

In summary, this case study is all about money-oriented, not people-oriented as the sales force did not even care to grow in and with the company, all they really wanted was money and movement. So, I enjoyed reading this case of Arrow Electronics.

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