Recently, the owner of KFC Franchise decided to change how she compensated her top manager. Last year, the manager received a fixed salary of $50,000 and KFC made $110,000 in profits (excluding the manager’s compensation). She feared that her store’s performance was connected to the top manager shirking on the job and expected that changes to her top manager’s compensation structure would improve sales. Therefore, this year she decided to offer him a fixed salary of $40,000 plus 5 percent of the store’s profit. Since the change, the store is performing much better, and she forecasts profits this year to be $300,000 (again, excluding the manager’s compensation). Assuming the change of compensation is the reason for the increased profits, and the forecast is accurate, how much more money will the owner make (net of payment to her top manager) because of this change? Does the manager make more money under the new payment scheme?
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Recently, the owner of KFC Franchise decided to change how she compensated her top manager. Last year, the manager received a fixed salary of $50,000 and KFC made $110,000 in profits (excluding the manager’s compensation). She feared that her store’s performance was connected to the top manager shirking on the job and expected that changes to her top manager’s compensation structure would improve sales. Therefore, this year she decided to offer him a fixed salary of $40,000 plus 5 percent of the store’s profit. Since the change, the store is performing much better, and she forecasts profits this year to be $300,000 (again, excluding the manager’s compensation). Assuming the change of compensation is the reason for the increased profits, and the
Does the manager make more money under the new payment scheme?
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