Structuring Compensation Plans
Compensation plans are an important component of a business as they can potentially spell its success or failure. Importantly, compensation plans in terms of wages, salaries, commissions, bonuses, and discounts play a part in the role of facilitating the workforce morale is energized. To a large extent, productivity in the workplace increase with the increase in the level of employee morale (Brickley, Smith, & Zimmerman, 2016).
Ideally, there are many factors which may result in firms structuring their compensation plans differently. Specifically, the scenario under study in this paper may be attributed to the different customer market which the businesses target. For example, Parkleigh Pharmacy eyes the high-end and upscale customer base while Kaufmann has its target on the middle-income consumers. Therefore, this is a situation where one sells limited and highly priced commodities while the other deals in averagely priced goods with a wide selection of them.
Since the products from Kaufmann are of average affordability, they require human personalized effort to sell them. On the other hand, Parkleigh products are high-end and that in itself makes them stand out. As a result, there is no need for sales representatives in this business. Additionally, it is prudent to offer commissions to Kaufmann’s staff due to their lower hourly wage when compared to those in Parkleigh’s. Further, these two businesses may have two differing ideologies on what leads to increased sales for the business. Kaufmann’s compensation team may be the philosophy that offering incentives to the sales persons drives up sales. In retrospect, Parkleigh may hold onto the thought that improved customer service is what leads to more sales especially when dealing with the high-end clients.
Practically, the cost of the products will be out-of-reach for a majority of the employees at Parkleigh. To this end, the discount from the company serves an important role in ensuring that they can afford these products. In essence, this has a positive ripple effect in two ways:
- By being able to afford and owning the goods they are selling, the employees feel more attached to them and make that extra effort albeit subconsciously to drive up sales.
- By owning some products from the store, the customer experiences and feels the product personally. In effect, they will have an in-depth understanding of the products when they are selling them to customers.
On the contrary, Kaufmann’s goods are relatively affordable and a discount to their employees may not be beneficial. Also, the employees’ regard of the products they sell can have an impact on the method of compensation to be used. For instance, Parkleigh’s employees may hold their products as an incentive since they are expensive as opposed to workers at Kaufmann.
Nonetheless, if neither store pays the sales commission, I expect Kaufmann’s hourly wage to be higher than Parkleigh’s. Ideally, the sales commission model for Kaufmann employees serves as an incentive for performance. Notably, withdrawing the sales commission from the employees’ package will leave them with no incentive other than their hourly wage. Consequently, the hourly wage has to be huge to excite them to work. In contrast, Parkleigh’s business and compensation model primarily envision growth in sales revenue without increasing the employees’ commissions. Additionally, Parkleigh’s employees will still be at an advantaged position as they will be benefiting from the discounts. Noteworthy, this form of incentive cushions them from feeling disenfranchised even when their hourly wage is lower than their Kaufmann’s counterparts.
Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial economics and organizational architecture (6th ed.). New York, NY: McGraw-Hill.