Deck 13: Optimal Compensation Systems, Deferred Compensation, and Mandatory Retirement

Question 1

Asymmetric information is most closely related to:

A) deferred compensation.
B) the principal-agent problem and monitoring of workers.
C) up-or-out rules.
D) the 1/n problem.

Answer 1

B

Question 2

All of the following are potential problems with inequality in the pay structure, except that:

A) It may not be attractive to workers with risk-averse preferences.
B) It can discourage free-riding behaviour on the part of workers, thus providing incentives to work more diligently.
C) It can discourage cooperative behaviour and teamwork.
D) It can encourage sabotage that prevents other employees from being promoted.

Answer 2

B

Question 3

Consider a deferred compensation scheme. Which of the following describes the wage productivity profile?

A) A wage curve below the productivity curve during the early stages of the career, and the opposite situation at the later stages of the career
B) A wage curve that coincides with the productivity curve during all phases of the career
C) A wage curve above the productivity curve during the early stages of the career, below the productivity curve during the middle stages of the career, and above it again during later stages of the career
D) A wage curve above the productivity curve during the early stages of the career, and the opposite situation at the later stages of the career

Answer 3

A

Question 4

Congratulations! You have just been hired as the director of human resources for the Hiram N. Firem corporation. Until now, this firm has typically hired labour in an unfettered, ultra-competitive labour market. It has always paid competitive wages, but has always laid off workers at the first sign of a downturn in product demand and hired them at the first sign of an upturn. Some might call this the disposable labour model, but in technical jargon, it is called a spot market. Now the management is considering modifying its compensation and lay-off practices.
• The first question that you must address is how the executives should be paid. Until now, they have received stratospheric compensation compared to the rank-and-file workers. Explain this phenomenon by appealing to the salary-as-a-tournament-prize approach of the economists Lazear an Rosen.
• In establishing the pay structure within an organization, trade-offs are involved in determining th optimal degree of inequality of pay. Explain the nature of this trade-off: what factors push toward salary compression, and what factors push toward greater dispersion?
• Now it is time to time to develop a wage/seniority policy for the rank-and-file workers. You are t analyze a deferred compensation system. Give a graph and a brief economic explanation of the wage productivity, and seniority profile. Explain the rationales for deferred compensation.
• Finally, explain the link between a deferred compensation mechanism and the policy of mandator retirement.

Question 5

Which of the following is true of banning mandatory retirement?

A) It reduces the continued employment of older workers.
B) The wages of younger workers will fall and the wages of older workers will rise further.
C) It may reduce the employment and promotion opportunities of younger workers.
D) It has postponed the age of retirement, except for university professors.

Question 6

Which of the following is a rationale against mandatory retirement?

A) It is a form of age discrimination.
B) It adds uncertainty to one's life without a specific date of the retirement.
C) It improves the viability of the public and private pensions.
D) It increases the monitoring costs of employer for older workers.

Question 7

Deferred compensation systems are those that contain:

A) wages above the level of an individual's marginal product of labour for more senior employees.
B) pensions accruing even after requirement.
C) pension benefits.
D) wages that are paid upon completion of the job.

Question 8

Deferred compensation reduces which of the following?

A) The need for constant, everyday monitoring of the marginal productivity of workers
B) The need for mandatory retirement
C) The need to provide incentive pay
D) The need to examine the past performance of a worker before hiring him/her

Question 9

Which of the following might be tempered or reduced by the negative ramifications of excessive inequality?

A) Mandatory retirement
B) Compensation by the piece
C) Executive compensation
D) Deferred compensation

Question 10

Which of the following regarding "deferred payments" is NOT correct?

A) Workers' productivities rise with seniority.
B) Workers' wages normally rise with seniority.
C) Deferred payment reduces monitoring costs.
D) Deferred payment reduces turnover.

Question 11

Which of the following is paid at the piece rate?

A) Medical doctors
B) University professor
C) Fire fighters
D) Auto workers

Question 12

The basic idea that underlies the theory of salaries as tournament prizes is that:

A) Workers are paid according to the 1/N rule of compensation.
B) Workers are paid according to their rank in a classification of the own, individual performances.
C) Workers are paid according to the average revenue product of individuals within a class of workers.
D) Workers are paid according to their own, individual values of marginal revenue product.

Question 13

The "lump-of-labour-fallacy" implies that:

A) The number of jobs at each firm depends on the state of the overall labour market.
B) The only way that an unemployed person can find work is for total employment to rise.
C) Work-sharing arrangements will not create any jobs.
D) The only way that an unemployed worker can find work is for someone who is currently employed to leave his/her position.

Question 14

Linear pay structures are those that award additional earnings evenly according to every unit of productivity or widget produced, while non-linear pay structures award additional earnings in very uneven fashion based on job categories that are ranked. Which of the following statements is false?

A) The non-linear pay systems occasionally generate disincentives for good performance.
B) The non-linear pay systems are thought to stimulate good performance.
C) The non-linear pay systems can generate non-cooperative behaviour.
D) The non-linear compensation systems tends to generate relatively egalitarian pay structures.

Question 15

One of the ways in which employees do not benefit from deferred compensation is:

A) the due process and seniority rules.
B) the periodic rather than the everyday monitoring.
C) the possible synchronization of the worker's income and expenditures.
D) the remuneration according to the worker's true contribution to the firm.

Question 16

An example of "piece rate" compensation is:

A) fee for service compensation.
B) executive compensation.
C) raiding and offer-matching compensation.
D) straight-salary compensation.

Question 17

Principal-agent theory deals with the problem of:

A) designing an efficient contract between the employer and the employee when there are incentives to cheat or shirk.
B) failed negotiations between workers and their employees.
C) designing an optimal compensation when there is perfect information.
D) designing an optimal compensation system to reduce turnover.

Question 18

Which of the following is not the rationale for mandatory retirement?

A) An employment contract should have a termination date when the productivity level of the employee is way below the paying wage of the employee.
B) Mandatory retirement may increase the need for the monitoring and evaluation of older workers.
C) Mandatory retirement may create a greater degree of certainty about when an employee will retire for future production planning.
D) Mandatory retirement can open up opportunity for younger workers.

Question 19

Which of the following do not apply to "superstar" salaries?

A) They are astronomical compared to even the salary of the second best performer.
B) A premium is paid even if the star is only a marginally better performer than the second best person.
C) They resolve the principal-agent problem.
D) They magnify small differences in skill into large differences in pay.

Question 20

What is the essence of efficiency wages?

A) Wages are determined by a bargaining process between the worker and the firm.
B) Wages may affect the productivity levels.
C) Wages are always paid according to the worker's marginal revenue product.
D) Wages are paid such that the allocation of labour is efficient.