Incentives in the firm–managing the carpet store

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Reference no: EM132195082

Case : Incentives in the Firm – Managing the Carpet Store

Jerry runs a small carpet store. His firm sells and installs carpets. He manages the operation from his office in the store where carpet is displayed. He pays his receptionist/secretary an hourly wage.

He has a saleswoman in the office whose job it is to sell carpet to people who come in shopping; she sells carpet that Jerry has already priced by the yard. Jerry pays this woman on a commission basis, as a fraction of the revenue generated.

Jerry also employs a salesman who goes to people’s homes to price the installation of carpet. This man has discretionary authority to price the installation of the carpet as he sees fit, and Jerry has a profit sharing arrangement with him: he gets to keep half of the revenue he generates over and above the cost of the carpet plus installation.

Finally, Jerry employs a couple of guys who actually install carpet in homes. Jerry pays them by the job, so many dollars per square yard installed, with a penalty in the event that any customer complains after the job is done.

With reference to any principal-agent (i.e., moral hazard) problems, critique the way Jerry compensates his employees. Then give Jerry a grade on his compensation policies (e.g., A+, B-, D, etc.)

Your critique/assessment:

Your letter grade for Jerry’s compensation plan:

Reference no: EM132195082

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