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Structuring Compensation Plans

Structuring Compensation Plans

Compensation plans are schemes to remunerate employees effectively for their contribution
towards the company’s success. These plans are well designed to motivate the employees to
work hard towards the organizations objectives and attainment of its goals.

  1. Why do you think compensation plans differ at the two firms? In particular, why do you think
    Kaufmann’s pays commissions to salespeople, while Parkleigh doesn’t? Why does Parkleigh
    offer employees discounts on purchases, while Kaufmann’s does not?
    The management of every company has its own way of handling issues of compensation. The
    management of Kaufmann’s ltd may believe that paying commission together with a minimum
    basic salary motivates the salesman to work hard rather than the other scheme used by
    Parkleigh ltd. Parkleigh may consider the commission payable on salary as too much
    overpayment to employees and the company may incur huge expenses on the payment of
    these commission. (Russell , 2006).
    Parkleigh’s offer to allow the sales men to purchase items at the store at 30% discount is meant
    to motivate the employees to work hard and increase productivity that will ultimately increase

Structuring Compensation Plans 2
the company’s profitability. Kaufmann’s has chosen the commission method as its own way of
motivating the employees and considers the discount method as not very effective to this effect.
b) Assume, for the moment, that neither store pays sales commissions. Parkleigh offers an
hourly wage plus the employee discount.
If Kauffmann’s ltd does not pay any commission then its employees will definitely be getting
fewer benefits than Parkleigh. Parkleigh compensation scheme will be better than those of
Kaufmann’s whose salaries would not include any incentives to work hard. (Hill and Jones,
2008) It’s obvious that lack of incentives will discourage employees so Kauffmann’s will be in a
bad situation economically than Parkleigh who will have an upper hand.
Kaufmann’s offers only an hourly wage. Do you expect Kaufmanns’s hourly wage to be higher
or lower than Parkleigh’s? Why?
Kauffmann’s hourly wage may be lower as the 5% commission is certainly a very good offer and
may result in higher incomes for the salesmen hence the salary may be considerably lower than
Parkleigh who offers only discounts on purchases but no commission on sales made.
To conclude most companies prefer to use a compensation plan that motivates the employees to
work hard and increase the organizations productivity and profitability without incurring too
much expenses on the employee incentive plans.

Structuring Compensation Plans 3

Hill, C., Jones, G. (2008) Strategic Management. Houghton Mifflin Company: New York.
Russell , R. (2006). “Incentives Matter” . Library of Economics and Liberty .

Structuring Compensation Plans 4

Chandler, A.D., Daems, H. (1980) Managerial hierarchies. Cambridge, Mass: Harvard
university press.

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