Question

You are the owner of a clothing retail store in Manhattan that sells brand name clothes, including high-end clothing brands. Your retail salespersons are paid a mean hourly wage of $15. Over the last several months, your sales have significantly declined and customer satisfaction surveys indicate that your customers are increasingly dissatisfied with the quality of service. You just took a course in microeconomics for business decisions in which you learned about the concept of principal-agent problem. To what extent should you apply this concept to increase the motivation of your retail salespersons? How should the performance of the retail salespersons be evaluated? Should you redesign the structure of compensation in terms of fixed pay (hourly wage) and variable pay (bonus, commissions)? i dont picture of answer, please

Answer 1

The decline in the sales can be reversed by changing the current compensation plan with an appropriate performance based one. Currently the agent (salespersons) have no incentive to increase the sales for your store because they are paid a fixed hourly wage irrespective of how many sales they are able to make. Since more sales require more effort, the agent (salespersons) are not putting their best effort as they realize that more sales (more effort) will not increase their compensation.

Bonus at the end of the month and commission on each sale is what you should look for. When the compensation is attached for each sales, the agents will be encouraged to put their maximum effort because this will increase their overall compensation. The bonus to the best salesperson at the end of a week or a month will increase competition among agents which will further encourage them to maximize their compensation (and indirectly, maximize the sales).

Of course there should be a basic minimum wage rate so that the compensation is composed of a fixed wage and a variable wage which depends on the number of sales they make.