Firm X is observed to pay more on average than other firms to its sales force.Compared to other firms,it pays less salary but more commissions to its salesforce.The turnover in its salesforce is also higher than other firms.Firm X earns the same rate of return as other firms.Which of the following is most consistent with these facts?
A) Firm X must pay more because it is attracting a more risk-averse sales force.
B) The higher pay reflects a greater investment by Firm X in the specific human capital of its salesforce.
C) The higher pay compensates the salesforce for putting more effort into selling, which in turn increases the productivity of its salesforce.
D) Its higher pay reflects a promotion-type tournament that sorts out those who don't want to work long hours.

Question

Quizplus · Accepted Answer

The fact that Firm X pays less salary but more commissions suggests that it is providing an incentive for its salesforce to put in more effort into selling. This increased effort may lead to higher productivity and sales, which would explain why Firm X can earn the same rate of return as other firms despite paying its salesforce more. Additionally, the higher turnover in its salesforce suggests that some individuals may not be willing to put in the extra effort required to earn high commissions, which may explain why Firm X pays less salary (to weed out those who are not willing to work hard). Overall, option C is most consistent with the given facts.

Firm X Is Observed to Pay More on Average Than