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Analyzing Managerial Decisions: Structuring Compensation Plans 
Parkleigh Pharmacy is a department store in Rochester, NY,
specializing in upscale, expensive personal accessories (e.g.
sunglasses, beauty aids, leather goods) and home decorations (e.g.,
crystal, china, table lamps). Kaufmann's is a large department
store chain, based in Pennsylvania, with several stores in the
Rochester area. Kaufmann's carries a broader range of products and
caters more to middle-income consumers.
Salespeople at Parkleigh are paid straight hourly wage (i.e. no
sales commissions). In addition, they are entitled to a 30 percent
discount on anything they buy at the store. By contrast,
salespeople at Kauffmann's are paid an hourly wage (lower than the
hourly wage paid at Parkleigh) plus a commission of 5 percent on
sales they make. They receive no discount on products they buy at
Kaufmann's on products they receive at Kaufmann's.
a) 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?
b) Assume, for the moment, that neither store pays sales
commissions. Parkleigh offers an hourly wage plus the employee
discount. Kaufmann's offers only an hourly wage. Do you expect
Kaufmanns's hourly wage to be higher or lower than Parkleigh's?

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