Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 14

ANALYZING MANAGERIAL DECISIONS: Structuring Salesforce Compensation
Assume that a salesperson, Edwynn Phillips, has the following annual compensation package:

This compensation plan induces Ed to exert a given level of effort in selling. Given this effort level, expected sales are $30,000 per year.
Below are 10 years' worth of data for Ed's sales and the average sales for other employees in the company (Ed's own sales are excluded in calculating this average). The expected value of average sales is also $30,000. However, in any given year, average sales might rise or fall, depending on general economic conditions, and so on. Some of these same conditions affect Ed's sales. Ed has no impact on the average sales for other employees.

Devise an even better plan using the more general form:

( Hint: Remember to adjust the intercept to keep expected compensation the same.)