Review the following case study and answer the question that follows.
During
the planning process for starting a gift shop in a local resort town
you began to question and consider different compensation plans for the
retail clerks. It was fairly standard in the area to pay retail clerks
$6.25 an hour. However, as you visited gift shops that were paying these
rather low wages you noticed that the clerks simply took orders and did
not sell or try to answer any questions for customers. In a visit to a
gift shop in Ft. Lauderdale last spring you struck up a conversation
with the owner. She was more than willing to share her experiences about
retail clerks. In fact, after a lot of trial and error she decided to
pay upper-quartile compensation. This consisted of a base wage of $9.50
an hour and a 3 percent commission on all sales. She mentioned that when
she went to this type of system her average transaction size increased
by 20 percent and that closure went from 28 percent to 40 percent. More
importantly, she found that her bottom line profit rose by 32 percent.
In short, by paying more for retail clerks she increased employee
productivity and the profits of her store.
For the gift shop you
are planning you initially estimated that traffic would be 30,000
visitors annually and that closure would be 24 percent. You estimated
your average transaction size at $32. Your gross margin percent would be
60 percent and fixed operating expenses would be $60,000 annually.
Variable operating expenses would be 20 percent of sales. Under this
plan you would pay two full-time clerks $6.25 an hour and you would
fill-in when things got busy.
Your new plan, which you want to
evaluate, calls for paying the clerks $9 per hour plus 4 percent
commission on all sales. Thus, your fixed operating expenses would go up
by $3,000 and variable operating expenses would rise to 24 percent of
sales. You believe that closure would rise to 32 percent and average
transaction size would rise to $36.
Based
on the impact each compensation strategy has on the net profit of the
business, which one should you pursue? Illustrate your work, to include
the net profit calculations of each strategy.
Must be in APA format. Please cite any outside sources if used.
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