Problem
The owner of a small manufacturing company has hired a Vice President. Annual compensation of the new Vice President is a flat salary of $50,000 plus 75% of any generated profit up to $150,000. For any profit over $150,000, the VP will be compensated at 10% of that profit.
I. Complete the following table and then plot (graph) the annual compensation of the vice president as a function of annual profit (VP compensation on the vertical y-axis and company profit on the horizontal x-axis).
|
Company Profit
|
VP Compensation
|
|
0
|
50,000
|
|
50000
|
87,500
|
|
100,000
|
|
|
150,000
|
|
|
175,000
|
|
|
200,000
|
|
|
250,000
|
|
|
300,000
|
|
II. Does this contract align the incentives of the new vice president with the profitability goals of the owners? Why or why not?
III. How would you redesign the contract to better align the incentives of the new vice president with the profitability goals of the company owner.