CHAPTER I
QUESTIONS:
1. Thinking back to our discussion in the chapter section, Caveat Emptor—Be An Informed Consumer,
evaluate whether the replacement of highly paid workers with lower-paid workers did or did not
cause Circuit City to perform so poorly. How confident are you in your evaluation? Why?
Answer – After evaluating the role of labor cost in retail electronics, I do believe that the
replacement of the lightly paid workers with lower-paid works helped in causing the poor
performance of Circuit City, but was not the main cause. The reason for such confidence is
simple, the story displayed various reason one was due to Best Buy’s ability to outperform
Circuit City who had as the book suggest in store customer experience as well as Best Buy’s
reduction being different than Circuit City. Which was mostly cutting its highly- paid
employees who were middle managers and its affects only hitting regional offices rather than
stores or employees at the stores.
2. Do you believe that the compensation changes at Best Buy are a major reason for its current
difficulties?
Answer – I do believe that Best Buy observed and is learning. Although, Best Buy have cut s in its
labor cost, and its affects has not affected the customer. Now from this I believe, the compensation
changes are not the reason that Best Buy is suffering with its current difficulties. I do believe it
competitors like Amazon-prime, E-bay, Walmart and Target and other big box stores like Costco and
Sam’s are the reason for such current difficulties for Best Buy.
3. Why are Walmart, Sam’s Club, and Costco doing better than Best Buy (and Circuit City)? Do they
have high pay?
Answer – The reason that Walmart, Sam’s Club and Costco are doing better than Best Buy and
Circuit City is simply because they offer their products with a lower price option. In addition to
having employees that have experience and very knowledgeable with the products as well as
having a management team whose great with organization. As it pertains to pay, let’s look at Best
Buy, how its employee’s salary is not much and we can see they found no need in helping to
improve the Company’s market share. With that being said, the employee’s compensation has
changed and has caused numerous problems, such as lack of performance, executives to leave, with
no incentives of recalculating executives stock. One must also understand that Walmart is a
company that is a public corporation group in American that operates as a big chain, just like
Costco and Target nationwide.
4. Are there larger problems in the competitive landscape for Best Buy that cannot be solved by
compensation strategy changes alone? When customers look to buy electronics, what options do
they have other than Best Buy and why would they choose these options over Best Buy? Where do
customers “test drive” the product and where do they buy it? Can compensation changes address
these challenges? Explain.
Answer – Best Buy has hired numerous staffs with lesser experience and lesser pay and also
offering lesser compensation. Though the happiness index of Best Buy is better than most of its
competitors, the stock it had in the store has been the problem. Its competitors are offering larger
number of sales by offering discounts to its customers. Only compensating your staffs to make high
sale is not only the solution, they had to change the way of doing business so that it satisfies
customers need.
While shopping for electronics goods, Walmart and Amazon are other competitors to Best Buy.
Since its rivals have been focusing on discounted price, customers are more attracted towards the
rivals. It shows that making your staff interact with your customers to only gain happy customers
cannot make business, you have to increase the number of sales at competitive pricing.
Customers test drive the products in the store or at home as Amazon provides home delivery service.
The availability of mass product online and shopping time reduction has been offering of Amazon
and highly discounted price of Walmart. SO customer rather choose either the time saving options or
high discount priced products.
Compensation somewhat can motivate your staffs to drive the customers but compensation alone
cannot increase the sale.
5. In 2011, American Airlines had labor costs of $7,053,000,000 and ASM of 154,321,000,000. If they
are successful in cutting $1.25 billion per year, what would their labor cost/ASM be and would that
be competitive with USAir? If you are interested, you may wish to do more reading about
American’s plan to cut labor costs to learn more about how they propose to do that.
Answer – From 2011 to 2018 in between 7 years,
1.25 billion cut per year = 1.25 * 7 = 8.75 billion per year
Labor Cost in 2018 = 7.053 – 8.75 = -1.697 billion (In profit of 1.697 billion)
If American Airlines cuts its labor cost by 1.25 billion per year, they will be making big save from
the labor cut.
Since the labor cost cut of American Airlines is higher than USAIR, they will surpass USAIR in
terms of cost saving. The more operation cost in the organization the more profit is needed. If by
cutting extra labor, the organization can benefit from then I suggest its good way to overcome
bankruptcy. The competitor of American Airlines has similar customer satisfaction so cutting off
operation cost will help it come out of bankruptcy.
6. What is your opinion on whether this change in compensation would significantly enhance
American’s ability to compete in the airline industry? How does American’s position compare to
that of Best Buy? Is having competitive labor costs of equal importance in the two industries?
Explain
Answer – Definitely the change in compensation plan will improve the overall performance of
the company. The distributed compensation can now be used to motivate the current staffs so that
they work harder to achieve the objectives. These changes will significantly help to improve the
conditions and be competitive in the market.
There is similarity with the American Airlines and Best Buy, since both have been outraged by its
competitors and has been forced to change the way of achieving organizational goals though they
had different offerings to the customers but the tagline for both is customer service and
satisfaction.
It’s must to have the organization to look after employees pay structure, they need to have
knowledge of its competitors offering pay to its staffs. The possibility of retaining your best
employees will be with the organization and the turnover ratio will be low. The ultimate line of
vision for the staff is to have the same organization goal. So being a happy and satisfied pay ratio,
it’s less likely for the staffs not to work for the organization.
CHAPTER II
QUESTIONS:
1. What will be the result of the bidding war for top brokers? Will most firms benefit? Who will be
the winners and losers? What about the brokers?
Answer – Due to bidding wars between brokers, firms are then able to hire the most qualified
candidates. At the same time, not all firms will benefit from this. Smaller firms cannot stand a
chance in bidding wars against bigger firms. They can’t afford to outbid a big firm. Because
of that, bigger firms really see the benefit out of bidding wars while smaller firms do not. The
people that benefit the most; however, are, of course, brokers. They are reaping all of the
benefits of bidding wars, brokers are earning an overly generous salary with an even more
generous bonus.
2. Explain why there is such a strong relationship between pay and performance for brokers. Why
isn’t this true of many other jobs?
Answer – Personally, my beliefs on relationships between pay and performance for brokers is
strong. When looking at how a person performs and its competitiveness they bring, the firms
will see profits. However, this may not be a true statement for other jobs. Since other issues
play a major part in its bottom line. From this there is, a strong relationship which is formed
bringing better pay for the broker and the firm as well as having to client to invest, thus
bringing in more profit for the company.
3. Should Bank of America change its compensation strategy to include more subjective
assessments of performance and a greater emphasis on cross-selling? What effect might this
have on its success in the bidding war for top brokers?
Answer – As it pertains to Bank of America, I do believe they should change their
compensation strategy. Which should include being more subjective to assessment of its
performance by having a greater emphasis on its cross-selling. Which will allow the firm to
see profits as well seeing a competitive advantage from its products. From this also allowing
a clear – cut success from the bidding war for the cream of the crop brokers and prompts
brokers to become top producers that will benefits both the firm and themselves.
4. In chapter 1, we talked about incentive and sorting effects of pay strategies. Describe the
incentive and sorting effects at Merrill Lynch and how changes to the compensation strategy
might affect them.
Answer – Well, when reflecting back over the incentives and sorting mention in chapter 1, and
how its effects of paying strategies effects Merrill Lynch what comes to mind, are two things
performance and loyalty. Meaning its efforts bring bonuses, both structure and up front.
Which is created for top performers and loyal brokers that fits in their format of compensation
strategy. However, if changes do occur the results would be bad for the firm. The broker will
no longer be loyal to the firm, which will hurt the firm profits and reputation.
Chapter III
Review Questions
1. Why is internal alignment an important policy in a strategic perspective of compensation?
Answer – Internal alignment, often called internal equity, addresses relationships inside of an
organization. It refers to the pay relationships among different jobs, skills or competencies within a
single organization. The value of these relationships in an aligned organization is that it is that they tend
to support the organization strategy, support the workflow, and motivate behavior toward organization
objectives. Furthermore, an organization that is internally aligned and has the capability to adapt to
changes will have the greatest change of success
2. Discuss the factors that influence internal pay structures. Based on your own experience, which
ones do you think are the most important? Why?
Answer – Internal pay structures are defined by the number of levels of work, the pay differentials
between each level and the criteria used to determine those levels and differentials.
Factors that affect internal pay structures can be categorized as either external or organization factors.
External factors include:
• Economic pressures
