Deck 12: Performance Measurement and Incentives

Question 1

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

Answer 1

A

Question 2

Which of the following terms best describes the principle stating that when allocating effort among a variety of tasks,employees will tend to exert more effort toward those tasks that are rewarded?

A) Effort allocation principle
B) Premium principle
C) Compensation principle
D) Risk-reward principle
E) Multitask principle

Answer 2

E

Question 3

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

Answer 3

E

Question 4

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 5

Which of the following terms best describes a contract that guarantees an agent some payment,but provides enough incentive so that the agent does not shirk?

A) Certainty equivalent contract
B) Risk-sharing contract
C) Risk premium contract
D) Variability reduction contract
E) Risk-averse contract

Question 6

Which of the following terms describes a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing?

A) Relative performance
B) Absolute performance
C) Herding
D) Risk sharing
E) Pay-for-performance

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

What term best describes the payment which must be offered to a risk-averse individual to willingly accept a gamble?

A) Certainty equivalent
B) Risk equivalent
C) Risk premium
D) Risk preference payment
E) Certainty payment

Question 9

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 10

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 11

Which of the following terms describes a contract based on information that cannot be observed by courts or arbitrators?

A) Explicit incentive contract
B) Implicit incentive contract
C) Risk sharing contract
D) Compensation contract
E) Pay-for-performance

Question 12

Which of the following terms describes a contract by which the value of the compensation depends on the measured performance of the employee?

A) Explicit incentive contract
B) Implicit incentive contract
C) Risk sharing contract
D) Compensation contract
E) Pay-for-performance contract

Question 13

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 14

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 15

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 16

Which of the following terms best describes a review system in which an employee's supervisor,coworkers and subordinates are all asked to provide information regarding that employee's performance over a period of time?

A) Traditional top down review system
B) 360-degree peer review system
C) Management-by-objective system
D) Subjective performance evaluation
E) Pay-for-performance

Question 17

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 18

What term best describes an agent who is indifferent between a sure thing and a gamble of equal expected value?

A) Risk sharing
B) Risk seeking
C) Risk neutral
D) Risk averse
E) Risk premium

Question 19

Which of the following terms best describes a piece of information on which an incentive contract (explicit or implicit)can be based?

A) Absolute Performance
B) Relative Performance
C) Incentive
D) Performance measure
E) Performance standard

Question 20

What term best describes how a firm performs based on a comparison to another firm in its peer set within an industry?

A) Absolute performance
B) Comparative performance
C) Proportional performance
D) Performance measurement
E) Relative performance

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 $400 per week (instead of $500)plus 20% of sales,at what effort level does the employee maximize their payoff?

Question 22

What type of performance measurement based process was used to determine Jack Welch's successor,Jeffrey Immelt,as CEO of GE?

A) Ratings compression
B) Merit ratings system
C) 360-degree peer review system
D) Promotion tournament
E) Management-by-objective system

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 $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 24

Which of the terms best describes the effect that results from supervisors giving all their subordinates average (or above average)grading to avoid making sharp distinctions between those subordinates when evaluating them?

A) Forced ranking system
B) Subjective assessment
C) Ratings balancing
D) Ratings compression
E) Merit ratings system

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?

Question 26

Which of the following is least likely a technique firms can use to mitigate the free-rider problem?

A) Firms can reduce the repeated interactions among team members so that actions depend less on what other members may have done in the past
B) Firms can keep teams small
C) Firms can allow employees to work together for long periods
D) Firms can structure teams so that their members can monitor one another's actions
E) Firms can use future periods of interaction and let natural team dynamics of peer pressure and social isolation take place as punishment for team members who have failed to contribute in the past

Question 27

Which of the following terms best describes a review system in which an employee and a supervisor work together to construct a set of goals for that employee?

A) Traditional top down review system
B) 360-degree peer review system
C) Management-by-objective system
D) Subjective performance evaluation
E) Pay-for-performance

Question 28

What term best refers to a wage payment made to an agent that exceeds his opportunity cost of working and discourages the agent from shirking?

A) Living wage
B) Efficiency wage
C) Minimum wage
D) Efficiency payment
E) Termination wage

Question 29

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)?