Question

Recently, the owner of a Trader Joe’s franchise decided to change how she compensated her top manager. Last year, she paid him a fixed salary of $70,000 and her store made $145,000 in profits (not counting payment to her top manager). She suspected the store could do much better and feared the fixed salary was causing her top manager to shirk on the job. Therefore, this year she decided to offer him a fixed salary of $35,000 plus 15% of the store’s profits. Since the change, the store is performing much better, and she forecasts profits this year to be $290,000 (again, not counting the payment to her top manager).

Assuming the change in compensation is the reason for the increased profits, and that the forecast is accurate, how much more money will the owner make (net of payment to her top manager) because of this change?

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Does the manager make more money under the new payment scheme?

Answer 1

Case 1

Manager is paid a fixed salary.

Salary to manager = $70,000

Profit of store = $145,000

Calculate the money made by the owner -

Money made by the owner = Profit of store - Salary to manager = $145,000 - $70,000 = $75,000

The owner will make $75,000 under old payment scheme.

Case 2

Manager is paid a fixed salary and a part of profit.

Salary to manager = $35,000

Profit of store = $290,000

Share of profit paid to manager = 0.15 * profit of the store = 0.15 * $290,000 = $43,500

Total amount paid to manager = Fixed salary + Share of profit = $35,000 + $43,500 = $78,500

Calculate the money made by the owner -

Money made by the owner = Profit of store - Total amount paid to manager

Money made by the owner = $290,000 - $78,500 = $211,500

The money made by owner under new payment scheme is $211,500

Calculate the increase in money made by owners -

Increase = Money made by owner under new payment scheme - Money made by owner under old payment scheme

Increase = $211,500 - $75,000 = $136,500

Thus,

The more money that owner will make due to this change in $136,500.

Yes, the manager makes more money under the new payment scheme.