Asked by Isabella Geiger on Sep 24, 2024
Verified
A payday loan company has decided to open several new locations in the city.To decide where to open these locations it hires consultants and pays them per store opened.At the end of the quarter,the company notices a many of the new stores' sales volume fail to meet expectations.To incentivize the consultants to instead focus on opening profitable stores,the company decided to alter the compensation to a percentage of the profit earned per new store.This puts the consultants
A) In a less risky position
B) A more risky position
C) In risk neutral position
D) None of the above
Payday Loan
A brief-duration loan with high interest rates, usually payable by the borrower on their upcoming payday.
Compensation
The total amount of the various salaries, wages, bonuses, benefits, and other forms of payment given to employees for their work.
Profitable Stores
Retail or commercial outlets that generate more revenue than the operating and other costs, thereby yielding profit.
- Understand the principle of aligning incentives between the company and consultants or sales agents.
- Recognize the risks and benefits of performance-based compensation versus fixed compensation.
Verified Answer
LO
Liang Oliver2 days ago
Final Answer :
B
Explanation :
By changing the compensation structure to a percentage of the profit earned per new store, the consultants' income will now be directly tied to the profitability of the stores. This means that if a store fails to generate a profit, the consultants will earn less or potentially even nothing as their compensation will be based on the profit earned. This is a more risky position compared to the previous compensation structure where they were paid per store opened regardless of its profitability.
Learning Objectives
- Understand the principle of aligning incentives between the company and consultants or sales agents.
- Recognize the risks and benefits of performance-based compensation versus fixed compensation.