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Pay and Performance Employment Contract – Formal vs. implicit contracts – Information asymmetries and cheating Signaling Self-enforcement Surplus Motivating.

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Presentation on theme: "Pay and Performance Employment Contract – Formal vs. implicit contracts – Information asymmetries and cheating Signaling Self-enforcement Surplus Motivating."— Presentation transcript:

1 Pay and Performance Employment Contract – Formal vs. implicit contracts – Information asymmetries and cheating Signaling Self-enforcement Surplus Motivating workers – Output/performance Pay – Time-based pay with supervision

2 Motivating the Individual in a Group – Fairness – Group Loyalty Productivity and the basis of pay – Employee preferences Variability of pay and risk Worker sorting – Employer Preferences O-B:Individual incentives O-B:Group incentives (free-rider) – executive pay Hybrid: T-B with merit increases

3 Output-based vs Time Based Pay Basic Considerations – Adverse Selection – Moral Hazard

4 Basic Considerations Adverse Selection Moral Hazard

5 Output-Based Pay O-B Advantages: – Incentives to produce more – Attracts more productive workers – Involves risk that may require a compensating differential O-B Disadvantages: – Quantity vs. quality – Effect on capital – Short-run vs. Long-run – Ratchet-effect

6 Time-based Pay T-B Advantages: – Problem and reduced cost of measuring output – Individual and group loyalty – Lower risk – less compensating differential T-B Disadvantages: – Adverse selection – Moral hazard – Reduced incentive

7 CEO Pay The Principal-Agent Problem – managers are not owners – Pay-based on profits – SR vs. LR – Stock Options – outside risk and avoiding risk -Straight - time-based pay with merit Over time more CEO have been receiving stock options Collusion between BOD and CEO – Home Depot Home Depot

8 Other Methods Efficiency wages – Better workers – More loyalty – Less turnover and discipline problems (self- enforcement) – Higher cost Tournaments – Time-based with prize


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