Economics 415 — Assignment for Masters Students

In keeping with university rules, the requirements for this class for graduate students are somewhat different than those for undergraduates. As you syllabus indicates, all master’s level students must write a paper on the economics of compensation that will count for 10 percent of your semester grade. Depending on the quality of the paper you submit, you may subsequently be offered the opportunity to rewrite it for 80% credit.

As explained more thoroughly below, your assignment is to analyze the effects of compensation systems at automobile dealerships, focusing on the economics of the incentive scheme. This assignment is intentionally open-ended, so there are many ways you might approach it. The only major constraint is that your analysis must be an economic one—not psychological, sociological, political, or ethical. You should also make sure that you actually analyze the situation, rather than merely summarize the facts.

Your paper should be as long as necessary, yet as short as possible. In most cases, five pages would be a good guideline. Your grade will be based on both the quality of your ideas and the quality of your writing. Assistance with writing is available on campus at both the UWM Writing Center (Curtin 382) and the Peer Mentoring Center (Bolton 192).

Topic: Confessions of a Car Salesman

Edmunds.com is a website that offers advice to people seeking to buy new and used automobiles. Much of the advice is about specific vehicles, common features of cars, or financing, but Edmunds also offers advice on negotiating with dealers. As part of the latter effort, a few years ago Edmunds hired an investigative journalist named Chandler Phillips to go undercover as a car salesman at two different dealerships. Phillips’ lengthy, often provocative account of his experiences can be found online at http://www.edmunds.com/advice/buying/articles/42962/article.html.

Your assignment is to read the article and analyze the personnel economics inherent in Phillips’ experiences. (You will probably also learn quite a bit about the automotive retail industry. Try not to write about it, unless you can relate it to personnel economics. But feel free to use what you have learned the next time you buy a car.) You may address whatever issues in personnel economics that you like, but the following are some issues you might want to consider:

• How do the different dealerships recruit potential salespeople? What traits are they seeking, and how to they find and hire workers who have them? Are they eager to hire applicants who would be considered desirable by other employers? Why or why not?
• What roles does patience play in selling cars? How do dealerships identify patient or impatient salespeople? What incentives cause a salesperson to become more or less patient? What are the pros and cons of making customers wait? What does the need to wait do to the level and elasticity of demand for a car dealership, in the short run and in the long run? How has the Internet affected waiting times and the elasticity of demand for cars?
• What sorts of commissions, bonuses, and (implicit or explicit) sales tournaments do the different types of dealerships use to encourage effort by sales people? (What form does “effort” take?) What reactions do such schemes elicit from salespeople? From customers? To what extend to the incentives encourage a salesperson to be more or less attentive to the customer’s needs and goals? What details make a compensation scheme more or less successful in each environment?
• At one point, Phillips writes, “[Salespersons’] fear of their managers is greater than their fear of offending customers.” Explain what he means. How do the managers enforce that fear, and what are its consequences? Are there any respects in which it might reduce profits? Does this form of motivation influence the type of salesperson the dealers can, or want to, hire?
• Sometimes salespeople work together to make a deal. What sorts of incentives encourage cooperation? Are there any incentives that discourage it? Why are sales made by teams or workers, anyway?
• Toward the end of the article, Phillips notes that managers can often “work their magic to rob a salesman of his commission.” What effect does that have on incentives?
• Judging from the article, it would appear that many sales people do not last long at a particular dealership. Why do they turn over so rapidly? How much do the dealers seem to mind this turnover? Why? What effect does a high rate of turnover have on sales? On customer service?