1. Pay and Performance Employment Contract Motivating workers
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: O-B Disadvantages:
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: T-B Disadvantages:
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 Tournaments Better workers More loyalty
Less turnover and discipline problems (self-enforcement)
Higher cost
Tournaments
Time-based with prize