Deck 3: Agency and Coordination

Question 1

At what level of effort does performance based pay in the form of salary-plus-commission yield the maximum payoff to an employee?

A)40 hours per week
B)As much as the employee can possible work
C)When the slope of a line tangent to the cost curve is one half of the slope of the salary curve
D)There is no effort level at which an employee can maximize their payoff given a salary-plus-commission pay construct
E)When personal marginal benefit equals personal marginal cost

Answer 1

E

Question 2

Which of the following factors is a way that companies can combat agency problems around commission based incentives?

A)Coordination
B)Monitoring
C)Bureaucracy
D)Offshoring
E)Better base pay

Answer 2

C

Question 3

How does Goldman Sachs as a firm manage issues around hidden information and hidden action of the firm's traders (agents)?

A)Monitoring at the department level only
B)Employee incentive based pay in the form of bonuses
C)A 30-member risk committee to examine the value at risk
D)Objective alignment between the firm and shareholders
E)A hedging program

Answer 3

C

Question 4

Which of the following is a tool a firm can use to combat agency problems?

A)Monitoring
B)Performance-Based Incentives
C)Bureaucracy
D)a, b & c
E)None of the above

Question 5

What factor has prevented managers from offshoring more complex IT functions for U.S.companies?

A)Hidden information
B)Agent issues
C)Principal issues
D)Coordination
E)Objective issues

Question 6

What term describes situations in which the aspects of the agent's action that are important to the principal cannot be observed?

A)Unobservable action
B)Hidden action
C)Covert action
D)Unobservable information
E)Hidden information

Question 7

How does a centralized organization solve coordination problems?

A)Allows for face to face communication
B)Creates a smaller organization
C)Reduces the costs of business
D)Concentrates decision making authority in a one or a small group of people
E)Information can take more time to trickle down

Question 8

Which of the following is not a performance based incentive?

A)A Nordstrom salesperson being paid a commission
B)A Kraft brand manager receiving an end of year bonus
C)A CEO receiving a stock option
D)A recurring standard percentage end of year pay raise
E)An employee receiving a special parking privilege award for the month

Question 9

What type of organizational structure is typically used in planning courses for an MBA program?

A)Centralized
B)Decentralized
C)Authoritarian
D)Top-down
E)Lottery

Question 10

What is a key factor in determining how a firm resolves coordination problems?

A)Incentive based pay
B)Effective IT systems
C)Firm culture
D)Alignment of goals
E)Organizational structure

Question 11

Which of the following solutions has addressed coordination problems in the tin market?

A)Pricing
B)Contractor
C)Monitoring
D)Scheduling
E)Software

Question 12

Which of the following factors is an effective tool for companies to use to mitigate hidden action and hidden information problems in agency relationships?

A)Monitoring
B)Offshoring
C)Coordination
D)Objectives
E)Confrontation

Question 13

What term describes situations in which aspects of the productive environment that are important to the principal cannot be observed?

A)Unobservable action
B)Hidden action
C)Covert information
D)Unobservable information
E)Hidden information

Question 14

Which of the following management actions reflects agency problems due to the fact that information held by the agent is hard to observe?

A)Enriching managers themselves even if shareholders do not benefit
B)Avoiding risky strategic initiatives even if shareholders view them as "reasonable"
C)Paying for services that seem excessive to the shareholders
D)Pumping up the firm's short-run performance even if shareholders are harmed in the long-run
E)Giving work a mediocre effort so managers do not have to work excessive hours

Question 15

Which of the following is not a characteristic of performance based pay?

A)The slope of the relationship between pay and performance for an employee provides incentives for effort, not the level of pay
B)Employees will always prefer performance based pay thus aligning principal/agent objectives
C)The overall value maximizing effort level for an employee occurs when personal marginal benefit equals personal marginal cost
D)Performance based pay can resolve hidden information problems
E)Pay contracts approaching 100% commission and negative salaries can occur

Question 16

Which of the following is not a reason Yahoo! CEO Jerry Yang as an agent would turn down Microsoft's takeover offer?

A)Yang believed the firm is worth greater than the offer
B)Yang believed that the combined firm would create value for shareholders
C)Yang was working on behalf of shareholders to maximize the purchase price
D)Yang had different preferences than shareholders regarding the firm's independence
E)Yang had hidden information about future projects for Yahoo!

Question 17

Which of the following is not a principal/agent relationship?

A)Shareholders/Company CEO
B)Shareholders/Company employees
C)Company/Hired counsel
D)Carmaker/Auto part supplier
E)Shareholder/IRS auditors of a company

Question 18

What is one way insurers address moral hazard (hidden action)problems to align the interest of the insured with the insurer?

A)Underwriting all applicants for insurance
B)Charging lower premiums for riskier ventures
C)Performance based incentives (i.e. linking premiums to presence of fire detectors)
D)Insuring different parties from the same industry
E)Require full disclosure of all information (i.e. health status prior to issuing an income annuity)

Question 19

How are the coordination problems that exist around the construction of a new home generally solved?

A)Pricing
B)Software
C)Bureaucracy
D)Contractor
E)Markets

Question 20

What is a benefit of the de-centralized organization coordination solution?

A)Ensures no coordination opportunities are missed
B)Makes the organization more hierarchical
C)Takes advantage of localized information
D)Improves communication
E)Always encourages collaboration

Question 21

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40
(1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of $500 per week plus 20% of sales,how can we write the employee's payoff function? What is the employee's total compensation for working a 46 hour workweek (Note: This is the compensation and not payoff net of effort costs)?

Question 22

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40
(1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of $400 per week (instead of $500)plus 20% of sales,at what effort level does the employee maximize their payoff?

Question 23

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40
(1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of base salary plus 20% of sales,what is the minimum base salary the firm can offer the employee and still have the employee willing to accept the job over a simple $2000 per week salary job?

Question 24

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40
(1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of $500 per week plus 20% of sales,what is the employee's marginal benefit of effort? How much more will the employee work than the standard 40 hour work week? What is the employee's actual salary when they work to maximize their payoff?

Question 25

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40
(1/3)*(e-40)² if e>40
What is the cost of effort for a 37 hour week? What is the cost of effort for a 43 hour week? If the firm offers a salary only job of $500 per week,what is the employee's payoff net of effort costs for a 49 hour work week?