Optimal Compensation Policy
Café-Nervosa.com, based in Seattle, Washington, is a rap- idly growing family business that offers a line of distinctive coffee products to local and regional coffee shops. Founder and president Frasier Crane is reviewing the company's sales force compensation plan. Currently, the company pays its three experienced sales staff members a salary based on years of service, past contributions to the company, and so on. Niles Crane, a new sales trainee and brother of Fraiser Crane, is paid a more modest salary. Monthly sales and salary data for each employee are as follows:
Sales Staff Average Monthly Sales Monthly Salary
|
Roz Doyle
|
$160,000
|
$6,000
|
|
Daphne Moon
|
100,000
|
4,500
|
|
Martin Crane
|
90,000
|
3,600
|
|
Niles Crane
|
75,000
|
2,500
|
Niles Crane has shown great promise during the past year, and Fraiser Crane believes that a substantial raise is clearly justified. At the same time, some adjustment to the compensation paid to other sales personnel also seems appropriate. Fraiser Crane is considering changing from the current compensation plan to one based on a 5% commission. He sees such a plan as being more fair to the parties involved and believes it would also provide strong incentives for needed market expansion.
A. Calculate Café-Nervosa.com's salary expense for each employee expressed as a percentage of the monthly sales generated by that individual.
B. Calculate monthly income for each employee under a 5% of monthly sales commission- based system.
C. Will a commission-based plan result in efficient relative salaries, efficient salary levels, or both?