Decisions Structuring Compensation Plans

ANALYZING MANAGERIAL DECISIONS: Structuring Compensation Plans

Read the scenario provided in the text and then answer the questions provided.

Book: Textbook: Looseleaf edition: Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial economics and organizational architecture (6th ed.). New York:McGraw Hill/Irwin. Special softcover version for Saint Leo: ISBN: 978-1-308-59318-0.

Chapter 14 – “Analyzing Managerial Decisions: Structuring Compensation Plans”

ANALYZING MANAGERIAL DECISIONS: Structuring Compensation Plans

Parkleigh Pharmacy is a small 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 a 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 Kaufmann’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.

1. Why do you think the compensation plans differ at the two firms? In particular, why do you think Kaufmann’s pays commissions to salespeople, while Parkleigh does not? Why does Parkleigh offer employees discounts on purchases, while Kaufmann’s does not?

2. 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 Kaufmann’s hourly wage to be higher or lower than Parkleigh’s? Why?

ANALYZING MANAGERIAL DECISIONS: Granting Stock Options

Bobby’s Burgers is a large restaurant chain with nearly 10,000 units worldwide. It is experiencing incentive problems among its outlet managers. The managers are not working very hard-are letting quality deteriorate at their units. CEO, Bobby Jones, is considering a stock plan where each unit manager would be given 500 shares of stock in Bobby’s Burgers. He reasons that making the managers part owners of the company will motivate better service.

1. Critically evaluate the proposed stock plan.

2. Discuss other ways that Bobby Jones might motivate increased effort at the units.