It can be stated that differences in compensation plans stem from differences in the scale of the two businesses. Parkleigh Pharmacy is a small department store that sells expensive accessories and home decoration for high-income customers, whereas Kaufmann’s is a large department store chain that offers a broad range of products for middle-income customers. It can be seen that Parkleigh Pharmacy and Kaufmann’s are two different target markets.
One could assume that Kaufmann’s pays commission to salespeople because it has a greater internal labor market as compared to those of Parkleigh Pharmacy. Employees who work in a company with a large internal labor market are expected to spend there much of their career (Brickley, Smith, & Zimmerman, 2016). Kaufmann’s is thus interested in motivating its employees to stay loyal to the firm and continue their work there. If incentivized, it is more likely that salespeople will not perform dysfunctional activities at the cost of losing future benefits. Considering the large size of Kaufmann’s, the organization may offer a commission for its workers without impacting the marginal revenue in a negative way.
At the same time, a small department store that sells a product to a restricted group of clients may be unable to offer a wide range of promotion opportunities and fringe benefits. The establishment of sales commissions for salespeople of Parkeligh Pharmacy may have a negative impact on marginal revenue products and be not economically feasible (Froeb, McCann, Shor, & Ward, 2015). Also, even though this information has not been given in the scenario, it should be mentioned that market wage rates may be different for Rochester and Pennsylvania. Nevertheless, the hourly wage is determined by the labor market, and the fact that there is a demand for a position of a salesperson at Parkleigh Pharmacy means that the company is paying at a competitive level.
Salespeople who work at Parkleigh Pharmacy and do not get commission may attain the appropriate level of job satisfaction so as not to consider more financially beneficial alternatives. Apart from that, since the customer base of Parkleigh Pharmacy consists of niche clients, the company may want to avoid salespeople pushing to make a sale to collect a commission, knowing that the customer will not be happy with the product. Parkleigh may offer its employees discounts on purchases in order to prevent stealing and increase sales. Also, the company may benefit from the discount being invisible to taxing agencies. In such a case, the firm will pay less amount of money as a revenue tax.
If neither store pays sales commissions, an hourly wage offered by Parkleigh Pharmacy is expected to be higher than that of Kaufmann’s. This may be explained by the sizes of both companies and the benefits they guarantee employees. Considering its great internal labor market, Kaufmann’s may be a good choice for people who can bear low payment at the entry-level but expect to get paid more in the future.
Moreover, despite the low hourly wage rate, the total package of Kaufmann’s may appear to be more beneficial than employee discounts and include insurance coverage, medical benefits, and a retirement plan. In turn, Parkleigh Pharmacy may not have such a great internal labor market and benefits package. Therefore, a high hourly rate and employee discount may be the only ways in which the company can meet the individual’s reservation utility.
References
Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2016). Managerial economics and organizational architecture (6th ed.). New York, NY: McGraw-Hill.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2015). Managerial economics: A problem solving approach (4th ed.). Boston, MA: Cengage Learning.