Question

One type of benefits we discussed involved giving workers discounts on the firm’s products. We noted that this type of system could reduce the firm’s costs by reducing some marketing expenses.

a. Explain why offering such discounts (as opposed to increasing workers’ cash wages by an equivalent amount) can also help to attract a more knowledgeable or enthusiastic sales staff.

b. Very few firms pay workers entirely in the form of merchandise discounts (or even just in the form of merchandise itself). Why not? Explain in terms of the cost the firm must pay in order to attract workers.

c. (This is related to part (b).) Many high-ranking executives receive part of their pay in shares of the firm’s stock, supposedly to motivate them to work to increase the firm’s stock price. In order to ensure the executives remain motivated, their contracts usually prohibit them from selling those shares for a long period of time. Question: Explain how the restriction on stock sales may force the firm to pay the executive more than it would if it simply paid the executive in cash.

Answer 1

A

When an organization offers discounts to its employees upon in-house manufactured products, then it creates a target audience that is based upon the employees, their families, relatives and friends at no any marketing cost. Besides, it creates a channel of word of the mouth publicity to promote the products among the other people. So, it creates an attractive selling proposition for the sales staff or executive. These people identify it as an opportunity to excel in their function and get attracted to the organization that offers such opportunities of already created target audience.

B.

A firm incurs costs in the form of wage and salaries that are paid to their workers. All the wages are not paid to the workers in the form of discounts by the firms due to the following reasons.

1. It reduces the profit margin of the organization if the products are offered at a discount. It only helps the organization to recover the cost of production.

2. It becomes discouraging to the channel partners who could offer the product to the same audience at the price rate rather on discount. It will also benefit the organization in recovering the profit over and above the cost of production.

3. Employees have different needs and all these needs cannot be fulfilled by the firm’s own products.

4. Cost of marketing per unit of product also increases.

Above reasons play roles that why not all the organization pay wages in the form of discounts.

C.

Since the shares or the stocks are to the liquidated in the future, it means that the profit will be realized in the future. So, to make this method of payment to be attractive and attract top executives, the organization pays higher wages in the form of shares than that of simple cash paid to the executives. It makes the payment in the form of shares as attractive because it will give higher returns, though it comes in the future.

Further, it is not that the total compensation package is given in the form of shares. Rather, it is a combination of cash payment, shares and incentives on the basis of profits earned by the firms. So, if shares are offered in higher volume, that it can attract the executives.