Managerial Decisions: Structuring Compensation Plans Economics /

¶ … managerial decisions: Structuring compensation plans

Economics / Chapter 14

Firms attempt to create attractive compensation plans in order to retain as well as motivate qualified employees. These compensation plans will vary among firms due to factors such as the nature of the product, competition, and location. In this particular case, Kaufmann's is a large chain department store which carries a broad range of products with a target of middle income consumers. With the knowledge that middle income consumers tend to spend more of their money on goods and services, this would tend to mean that there is the possibility for them to sell more goods than Parkleigh Pharmacy, as Parkleigh Pharmacy sells very expensive products. Taking this into consideration, Kauffmann's offering a five percent commission on sales will motivate the sales person to increase sales. This will in turn benefit Kaufmann's, as it would increase its sales revenue. On the other hand, Parkleigh Pharmacy does not offer any sales commission to their employees. This is due to the fact that they are not selling products that would tend to attract middle income consumers, but instead offer only luxurious and expensive goods.

Based on these facts, it would be reasonable to assume that sales at Parkleigh Pharmacy will be less than sales at Kaufmann's. This drives the reasoning for Parkleigh Pharmacy to only offer their sales people an hourly wage with no opportunity for earning commissions on any sales that they make. However, they take a different approach in motivating their sales people by offering them a thirty percent discount on any items they purchase from the store. This type of fringe benefit is benefitting both the employee and the firm. With the sales people being able to purchase luxurious products at a discounted rate, this will simultaneously increase sales of Parkleigh Pharmacy. These differences in compensation plans exist across many firms, and the variances are dependent upon the individual firm's objective and scope.

If it was in fact true that neither store paid any commission to its employees, then the hourly wage offered at Kaufmann's should be higher than that of Parkleigh Pharmacy (who also, unlike Kaufmann's, offers an employee discount on products purchased in the store). This is because a firm's compensation plan should be designed to attract efficient workers who will benefit the firm by creating greater sales and a high turnover rate (Polachek & Siebert, 173). With the implication that projected sales for Kaufmann's are high, the firm should aim to retain efficient sales people. This can be accomplished by either paying a higher hourly wage, or establish a balanced combination of hourly wage and sales commission.