Assignment:
Analyzing Managerial Decisions: Structuring Compensation Plans
Parkleigh Pharmacy is a department store in Rochester, NY, specializing in upscale, expensive personal accessories (e.g. sunglasses, beauty aids, leather goods) and home decorations (e.g., crystal, china, table lamps). Kaufmann's is a large department store chain, based in Pennsylvania, with several stores in the Rochester area. Kaufmann's carries a broader range of products and caters more to middle-income consumers.
Salespeople at Parkleigh are paid straight hourly wage (i.e. no sales commissions). In addition, they are entitled to a 30 percent discount on anything they buy at the store. By contrast, salespeople at Kauffmann's are paid an hourly wage (lower than the hourly wage paid at Parkleigh) plus a commission of 5 percent on sales they make. They receive no discount on products they buy at Kaufmann's on products they receive at Kaufmann's.
a) Why do you think compensation plans differ at the two firms? In particular, why do you think Kaufmann's pays commissions to salespeople, while Parkleigh doesn't? Why does Parkleigh offer employees discounts on purchases, while Kaufmann's does not?
b) Assume, for the moment, that neither store pays sales commissions. Parkleigh offers an hourly wage plus the employee discount. Kaufmann's offers only an hourly wage. Do you expect Kaufmanns's hourly wage to be higher or lower than Parkleigh's? Why?