System of fixed wages
Managerial Economics
American Linen is a company that has multiple salespersons. In 2008, it changed the compensation method for its sales force, moving from a system of fixed wages to one of base wage plus commission. As a result, American Linen’s total revenue from sales increased by almost 30%, and the average compensation received by a salesperson also increased substantially. The firm is currently contemplating the introduction of comparative performance evaluation in their compensation. One alternative is to determine the variable part of each salesperson’s compensation by comparing his or her performance to the average performance of the firm’s sales force. The second alternative is similar, except that it uses the average performance of the sales force at rival firms.
A. Explain why the change from a system of fixed wages to one of base wage plus commission can lead to an increase in sales revenue.
B. Explain how the introduction of comparative evaluation can reduce the firm’s cost of compensating its sales force. Which alternative would you favor? Why?
