Structuring Compensation Plans

Parkleigh Pharmacy is an upscale department store in Rochester, NY, who sells personal accessories and home decorations. Kaufmanns is a departmental store based in Pennsylvania and has several stores in Rochester, NY. Kaufmann carries broad range of products and caters middle class customers. Salesperson at Parkleigh are paid a straight hourly wage (e.g,. no sales commission) and 30% discount from purchase any product from Parkleighs store. Salesperson at Kaufmann gets an hourly wage which is lower than Parkleighs hourly wage but gets 5% commission on sales. However, salesperson doesnt get any discount on product they buy from Kaufmann. Based on the above situation answer the following questions:

1. Why does the compensation plan differ at the two firms? Explain why does Kaufmann pay sales
commission and Parkleigh doesnt? Why does Parkleigh provide discount and Kaufmann doesnt?

2. Suppose, neither of the firms pay sales commission. Parkleigh provides an hourly wage plus
employee discount and Kaufmann provides an hourly wage without any employee discount. Do
you expect Kaufmanns hourly wage to be higher or lower than Parkleighs? Why?

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