Question

Al Mutawaa Trading Company was founded in 1975 and is now one of Oman's leading suppliers of engineering products, building materials, sanitary goods, mixers and sinks, finishing products and swimming pools. The CEO of Al-Mutwaa was surprised to find out a high rate of employee turnover during the last few months. The HR manager stated in the report that the main reason why employees resign from the company is that they were not satisfied with their salary. Currently the company is following fixed salary OMR.800.The manager called for an emergency meeting to discuss the revision of its compensation plan for its employees. He believes that compensation is an important factor in attracting and retaining employees. Both employees and the company will benefit from a successful compensation package. The company makes the following recommendations after extensive debate with effective financial professionals;

A. Fixed salary of OMR 850 per month.

B. Straight Commission with Draw - 4% Commission on sales and Draw –OMR 300

C. Employees will be paid based on the following schedule

Commission(%on sales)	Sales(OMR)
3.5	Up to 25,000
5	25,001-30,000
7	Above 30,000

Question No-5

i) According to the variable commission scale, what will be the Gross pay of Mr.Majid,   whose sales is 28,000 in a month?                                                 

ii) As per variable commission scale, if Mr. Hamed’s sales are 32,000 in a month, how much more will be his monthly earnings compared to his current salary?   

iii) If Mr. Khalid’s sales is 27,000 in a month, suggest whether straight commission with draw or fixed salary is beneficial to him.                                                                                                    

iv) Suggest which method of payment will motivate the employee to work hard. Justify your answer

Answer 1

Question 5(i):

Gross Pay of Mr. Masjid = (25000*3.5%)+(28000-25000)*5% = OMR 1025

Question 5(ii):

Gross Pay of Mr. Masjid = (25000*3.5%)+(5000*5% )+(32000-30000)*7% = OMR 1,265

Current Salary OMR 800

Increase in Gross Salary = 1265 - 800 = OMR 465

Question 5(iii):

Gross Pay of Mr. Masjid under Straight Commission with Draw = 27000*4% + 300 = OMR 1380

Fixed Draw = OMR 850

Hence, Straigt Commission with Draw is Beneficial

Question 5(iv):

Equilibrium Sales between Variable Commission and Straight Commision Plus Draw

Let X be the Monthly Sales

(25000*3.5%)+(5000*5%)+(X-30000)*7% = (X*4%) + 300

X = OMR 42,5000

Equilibrium Sales between Fixed Draw and Straight Commision Plus Draw

850 = (X*4%)+300

X = OMR 13,750

If sales is below OMR 13,750 Prefer Fixed Pay

If Sales is between 13,750 and 42,500 Prefer Straight Commission Plus Draw

If Sales is above 42,500 Prefer Variable Commission Pay