Question

You are the human resources manager for a famous retailer and are trying to convince the president of the company to change the structure of employee compensation. Currently, the company’s retain sales staff is paid a flat hourly wage of $20 per hour for each eight hour shift worked. You propose a new pay structure whereby each salesperson would be compensated for $10 per hour, plus 1% of the store’s daily profits. Assume that, when run efficiently, each store’s maximum daily profits are $25,000. Outline the arguments that support your proposed plan.

Answer 1

Answer: Employees' pay depends on store profits, so they will work hard to achieve higher profits

Explanation: The employees have little incentive to work hard in a flat hourly wage because working hard will not directly provide any benefit to them. Hence adversely affects the firm because will reduce the profits than the $25,000 per store that is obtainable each day when employees perform at their peak. Under the proposed pay structure, employees are offered strong incentive to enhance the effort, and this will increase the profits for the firm. In the fixed hourly wage, an employee receives $160 per day irrespective of working hard or not, however in the new pay structure, an employee receives $330 per day when the store achieves its maximum possible daily profit and only $80 if the store’s daily profit is zero. It gives the employees an incentive for working hard and to exert peer pressure on employees who might otherwise goof off. When employees are provided an incentive to earn extra money by working hard then both the employees and the firm gains.