Exam 15: Incentive Compensation

FancyFoods provides a monthly bonus for servers when sales volume exceeds 120 percent of the same month last year.The size of bonus is tied to the individual server's sales of meals in comparison to an average server's sales.This system attempts to introduce a(n):

Team production is a limiting factor as a solution to incentive problems because:

Consider the salary of Mary Sue Nelson,a sales agent for Plain Truth Advertising.Her weekly compensation package is ,where Q is her dollar volume of sales.Her productivity is ,where e denotes her hours of effort and µ,is a random variable with mean 0.If Mary Sue works an additional hour,the expected value of her wages rises by:

Incentive compensation schemes are more likely to be value enhancing if:

It is better to pool risks because you can:

Strong incentives are provided by:

Consider the salary of Mary Sue Nelson,a sales agent for Plain Truth Advertising.Her compensation package for a week is ,where Q is her dollar volume of sales.Her productivity is ,where e denotes her hours of effort and µ is a random variable with mean 0.She has an effort cost of .Under this contract,her choice of effort will be:

By offering a compensation package rich in fringe benefits and slightly lower pay,a firm is more likely to attract:

What is the role of the "informativeness principle" in designing a compensation package for an individual in a corporate environment?

When employees are offered incentives to find new customers,but the aggregate economy is so weak (in recession)that the firm loses consumers,then the incentive plan:

To qualify as incentive pay,a performance-based compensation program:

There is scientific evidence to suggest that:

The informativeness principle tells us that:

FancyFoods belongs to the Restaurant Trade Association.One of the services that the trade association provides is monthly data on total regional sales of restaurants.In designing a bonus system for employees,this service:

Why do many firms base incentive pay on group performance?

Incentives are not likely to be a problem if:

In the single-period principal-agent model:

If all issues of effort,output,and pay are fully observable and contactable between an owner and an employee,then:

Economists believe the free rider problem is very important in complex business organizational structures.Still,businesses continue to build teams to solve problems or to deliver products to consumers.Often special rewards or bonuses are provided to the team rather than to the individuals in the team.Write a brief essay that either defends the economists' concern or explains why economists are wrong on this issue.

In the principal-agent model,at the employee's optimal effort choice: