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Compensation Plan Structures

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Last year the owner of an auto dealership changed her sales manager's compensation plan. Previously, the manager received a fixed compensation. After the change, the manger's compensation was based on a percentage of sales. Compared to last year, sales have increased substantially but profits declined. Using economic analysis, explain the outcome and then recommend additional changes that would correct the situation.

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The economic analysis is that when the auto company owner changed the compensation from fixed compensation to a percent of sales, the manager decreased the prices of the cars sold. In other words he shifted the supply curve to the right. The new equilibrium point was such that the number of cars sold increased but the prices of the cars sold decreased. When the prices were reduced the difference between total revenue and ...

Solution Summary

The response provides you a structured explanation of how to modify the sales manager's compensation plan. Compensation plan structures are determined. It also gives you the relevant references.