Debbie Data is a leading executive at SAS Institute who decides to start her own analytics consulting company. Debbie has put together an initial staff of four experts who are well versed in data management, statistical methods, and business applications. They must perform to exacting standards on consulting contracts so that clients are extremely satisfied. Debbie's staff also must be able to bring in new clients, which demands strong sales skills. Debbie must decide how much to pay the new hires. Analytics consultants at competing firms make an average of $240,000 per year. Debbie is thinking about three options:

PLAN 1: Pay each person $1,000 per day. With 240 working days per year, this will yield a competitive outcome.

PLAN 2: Pay each person $900 per day plus 10 percent of all the new client revenue that person brings in.

PLAN 3: Pay each person $900 per day plus 10 percent of all profits the new firm generates.

Debbie has asked you to evaluate each of these pay options.

a) Which of the three pay plans results in the lowest level of alignment between the incentives of the consultants and Debbie's desire to maximize profits? Explain why.

b) Which pay plan does the best job of aligning the incentives of the consultants with Debbie's desire to maximize profits? Explain why.

c) No incentive plan is perfect, even the one that does the best job of aligning incentives between Debbie and her new hires. What will Debbie need to look out for to make sure the plan is successful in meeting its goals? Explain why.