Reference no: EM132312515

Your company currently produces and sells software for property and casualty insurance companies. You are planning to expand the product and sell the expanded product to life insurance companies. You are currently negotiating a deal to hire Phil Dybvig to market this product to life insurance companies since Phil has considerable experience selling software to life insurance companies as he works for another software firm that sells to life insurance companies. Phil is paid $150,000 in his current job and is not a risk averse guy. The following facts are also important:

• If the product is modestly successful it will generate revenues of $500,000 and if it is very successful it will generate revenues of $800,000.The project will be modestly successful if rivals have a comparable product in the pipeline. Phil knows whether rivals have a comparable product in the pipeline or not but you don't.
• Your product will cost $300,000 to fully develop and hence it is profitable after paying Phil's reservation salary for both revenue outcomes.

Your HR staff has come up with a proposal to pay Phil a base salary of $40,000 plus 20% of the sales that the product generates. Explain to your HR staff why offering Phil an alternative proposal, $110,000 base salary and 10% of sales revenues, is a better idea even though the incentives are a little weaker.