Imagine a group of stockbrokers working in an office together. They are emloyed
ID: 357432 • Letter: I
Question
Imagine a group of stockbrokers working in an office together. They are emloyed by a large investment bank that advertises that they care about their customers and work hard to satisfy their needs. The brokers engage in retail relationships with individual customers who wish to use the brokers to buy and sell stock. The brokers were traditionally paid largely by salary with a modest bonus for the few very best performers as determined by the subjective judgement of the Supervising Broker on site.
1. Please identify ways that one stock broker might help or assist another in doing his or her job? Please list two or three that seem the most meaningful to the firm and explain.
2. Why might one stockbroker be willing to help another under the current salary payment scheme? What do they get out of it?
Now, imagine that the firm adopts a new performance pay scheme that pays each stockbroker ONLY based on the volume of their own sales and trades(they are essentially paid commission for the activity of their own customers)
3. Describe the positive (productivity enhancing) consequences of a new performance pay scheme that rewards each stock broker only on the volume of their own individual sales and trades.
4. Explain how this scheme might ultimately hurt the firm. Detail the potential negative consequences for the brokers, the firm and customers.
5. How might you rearrange the pay scheme (use other incentives or remove those that exist to avoid the problem you have identified.
Explanation / Answer
1. a. The broker might use his own customer contacts to help a new broker who might be struggling to get more customers.
b. The broker could elaborate the policies and procedures of the company to other broker so that he is clear about the company policies and does not commit any mistakes.
c. He could also help him learn the job that is to be performed by briefing about the work procedure and giving him on-the-job training.
2. One stockbroker might be willing to help another under the current salary payment scheme because there is a bonus component for the top performers based on the subjective judgement of the supervisor. So the supervisor could recognise the stockbroker as the one who is willing to go extra miles to help others and might consider him as top performer.
If a new performance pay scheme is incorporated that pays each stockbroker ONLY based on the volume of their own sales and trades, then there is no incentive for the stockbrokers to help others and might increase the competition between them as well as they will engage in getting more and more customers for themselves. This results in no help for each other.
3. The positive (productivity enhancing) consequences of a new performance pay scheme is that the business volume of the organization will increase as the stockbrokers will feel the need to target more and more customers in order to gain benefits out of the new performance pay scheme.
4. This scheme might ultimately hurt the firm because in the long term, this will not create a healthy competition between the brokers and they will always be engaged in cutting the other brokers' customers and making them their own. This will decrease the customer satisfaction and customers will move out from the company, hitting the profit margins of the company and decreasing its brand value.