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?

Question

Quizplus · Accepted Answer

The fact that Firm X pays less salary but more commission suggests that the motivation for the salesforce is based on their performance. The higher pay compensates the salesforce for putting more effort into selling, which leads to higher productivity. The turnover in its salesforce being higher than other firms could be the result of the promotion-type tournament that sorts out those who don't want to work long hours, but it is not the most consistent explanation given the other facts presented. Option A is inconsistent with the higher turnover rate, and Option B does not explain why the turnover rate is higher than other firms.

Firm X Is Observed to Pay More on Average Than