Structuring Compensation Plans

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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, wit 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 (Brickley, Smith & Zimmerman, 2009, p. 359).

There are many reasons why the two businesses differ from one another and why the compensation plans for each are different for their employees. Both companies target a different consumer market. Parkleigh targets higher income families by selling high quality products with higher monetary value. Kaufmann’s targets middle-income families by selling affordable products with greater value selection. Parkleigh employees do not receive commissions based on sales because the employees make decent income based on traditional salary, and the brands being sold essentially sell themselves. Kauffman’s employees receive commission on sales because their salary isn’t as strong, and the products being sold need that extra edge to produce sales. Parkleigh gives discounts to its employees because the products being sold have a higher net value that can be reduced to wholesale costs, and are valued by its employees as an incentive. Kaufmann’s does not give its employees discounts on products because the products it sells hold a retail value that should keep strong, and employees do not value their products enough to make them incentives.

If each store didn’t give a commission on sales and only provided an hourly wage to its employees, then the scenario would change. Parkleigh sells high end products to middle-income families, and expects growth within the revenue of sales regardless of commission. The discount on products to its employees may not be the best alternative because of the fact that Parkleigh doesn’t sell as many products as Kauffmann’s. The hourly wage of Kauffmann’s would be higher than that of Parkleigh because the employees wouldn’t have any other incentive to perform well. The products of Kauffman need the employee to perform well in order to drive sales of their products.

REFERENCES

Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics & Organizational Architecture. (5th ed., p. 38). New York: McGraw-Hill Irwin.