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Analyzing Managerial Decisions 1


Analyzing Managerial Decisions: Structuring Compensation Plans
Rodolfo Handal
MBA 540
June 22, 2014
Dr. Patrick Murphy

Analyzing Managerial Decisions 2

Analyzing Managerial Decisions: Structuring Compensation Plans
Firms structure their compensation and incentive packages based on the nature of their business
in order to ensure that resources are appropriately used and that the goals of the firm are also
aligned with those of employees. In the case of Parkleigh Pharmacy, the small department store
specializing in upscale, expensive personal accessories and home decoration pays employees
hourly and are entitled to a 30 percent discount, whereas employees from Kaufmanns are at a
lower hourly rate, yet offered a 5 per cent commission on all sales.

Parkleigh Pharmacy sells upscale, expensive personal items, most likely targeting the upper
class. For this reason, the firm has taken the strategy of establishing a straight hourly wage that
includes no commission, but offers employees a 30 percent discount. Parkleigh could have taken
this approach in the first place as the firm is more concerned with providing quality treatment to
its customers. By structuring compensation in such a way, the store avoids having employees
pressure clients in order to make a sale.

The second reason why Parkleigh could have structured its compensation package in such a way
is that they were more interested in attracting older employees, who wanted a more stable
income and were also attracted in buying the stores products. In contrast, Kaufmann is a
department store that targets the middle class and needed a younger workforce that would not
only be more aggressive in their sales, but that also was motivated by the incentive portion of

Another reason why Parkleigh could have opted for this mix was to motivate employees to stay
with the store for a longer term period. In contrast, Kaufmanns was not as concerned with how
long employees stayed. Parkleigh could have taken this approach as it wanted its employees to
develop more personal relationships with its customers. On the other hand, Kaufmann might
have been more concerned about the volume of sales per employee and was not as concerned
about the positive effects of long-term employment relationships. Brickley, Smith & Zimmerman
(2009), point that employees who consider shrinking, stealing or other dysfunctional activities
must weigh heir potential benefits of these actions against the cost of losing future benefits
should they be caught and dismissed.

Considering the fact that Parkleigh is only a small department store and Kaufmann is a large
department store with several stores in the Rochester area, the strategy adopted by Parkleigh had
to be different as the growth opportunities for its employees were most likely small; therefore,
the firm had to offer a premium to compensate for this factor. On the other hand, Kaufmann took
the option of paying employees lower salaries as it could have been perceived by potential
employees as having more growth opportunities and therefore meriting a lower hourly salary
with the expectations of higher salaries as they grew within the firm.

Even though Kaufmann offered only an hourly wage and Parkleigh offered an employee
discount, most likely Parkleigh would still be paying a higher hourly rate for the reasons stated
above, including but not limited to, the customer base, the growth prospects, and the long-term
employment relationship. In addition to this factors, there are many other factors that can be used
to make an assumption as to whether Parkleigh or Kaufmann would offer a better salary. One
Analyzing Managerial Decisions 3

example would be for example if Kaufmann is located in a better location, then most likely
salaries would be lower as transportation costs for employees would be cheaper.

Analyzing Managerial Decisions 4

Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial economics and organizational
architecture (5th ed.). New York: McGraw Hill/Irwin.