Expanded Issues

Expanded Issues - Sales Representative Compensation...

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Sales Representative Compensation Currently, NeverFail has established a policy that the sales representatives make a commission of 10% of the face amount of the life policies over five years. This compensation method presents several issues. First, sales reps have the potential to make a greater amount being compensation on the face amount of policies rather than the discounted present value of policies. Second, it needs to be determined if the 10% commission meets or exceeds industry standards. Discounted Present Value Discounted present value can be determined by discounting future payments to the present time . ˡ Since insurance policies do not pay out until the death of the insured, the actual timeline of the payment cannot be definitely determined. Sales reps at NeverFail will be making 10% on insurance policies that may not actually be paid out for 5 years or longer which is giving more value to the policies than they should currently be worth. It has been proposed that sales representatives should make their compensation based on discount rates provided by a mortality or life expectancy table. Using a more realistic measure of the value of the life insurance policies will give NeverFail and shareholders a more accurate view of how the company is doing financially. A sample life expectancy table can be seen in Appendix A. This chart, provided by the United States Social Security Administration, provides the probability of death within a year for American citizens. Most people looking to buy insurance policies are terminally ill which may shorten their estimated life expectancy; however the industry needs to set a uniform standard for
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how to calculate time until payment. Annual rate of return is the pretax rate of return desired by investor. The annual rate of return should be calculated on a policy by policy basis. ˡ Monetary and Financial Statistics Manual, IMF, Washington, 2000, paras. 219-220. http://www.imf.org/external/pubs/ft/mfs/manual/index.htm Director Compensation The director of Division One receives an annual bonus of 1.15% of the increase in face amount of the purchases in the current year over the purchases in the prior year. In general, the ethics of executive compensation is always questioned. Additionally, this compensation puts extra pressure on employees to perform at a higher level each year creating a hostile work environment. Executive Compensation Issue It has been known that bonuses do create an incentive for sales to increase. However, bonuses for each individual sales representative would also create the same drive to increase sales. By giving a bonus to one individual who oversees all of the sales reps it does not efficiently motivate each employee. Since NeverFail is potentially considering going public, they should consider hiring a consultant to examine their compensation practices³. Hiring a consultant would allow them to consider other possible forms of compensation that will also increase sales. A stock bonus would
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encourage the director to want the company as whole to do better. Currently the director is only
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Expanded Issues - Sales Representative Compensation...

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