Deck 11: Incentive Pay

Question 1

One disadvantage of using a tournament is that

A) no one will apply for tournament-style jobs.
B) tournaments are more expensive than time rates or piece rates.
C) workers who view themselves as losing the tournament will quit providing effort.
D) the winners of tournaments are typically overpaid.
E) tournaments are not able to identify the most productive workers.

Answer 1

C

Question 2

One argument against using a profit-sharing scheme is the potential for free-riding. In this situation, free-riding refers to

A) one firm using the same contract specifications as another firm.
B) a worker not providing effort because his contribution to profit is very small.
C) a worker not providing effort because he does not want his coworkers' wages to increase.
D) the firm not honestly reporting its profits.
E) profits being insensitive to worker effort because all increases in profit are returned to the workers due to the profit-sharing scheme.

Answer 2

B

Question 3

Which one of the following statements best describes profit sharing?

A) It is an equal division of all revenues among workers.
B) It ties pay to the performance of individuals.
C) It is a program that donates profits to the poor.
D) It provides a system by which workers receive a share of the firm's profits.
E) It discourages free-riding among workers.

Answer 3

D

Question 4

Piece rates typically

A) encourage greater effort from workers.
B) are more common than time rates.
C) are associated with the worker incurring less risk concerning one's income.
D) are more common among lower paying jobs.
E) do not reward skill.

Question 5

If designed correctly, tournaments

A) discourage competition.
B) reward players according to their ranked productivity.
C) elicit equal effort from all workers.
D) always reward a single winner.
E) reduce the applicant pool to just those workers with the best degrees.

Question 6

Empirically, the relationship between CEO performance (measured in terms of share price) and CEO compensation is

A) large and positive.
B) small and positive.
C) nonexistent.
D) small and negative.
E) large and negative.

Question 7

When considering the running of a corporation, there is a principal-agent problem between shareholders and the CEO because

A) shareholders want the firm to maximize the firm's share price while the CEO wants to maximize profits.
B) the CEO is paid in part with stock options.
C) shareholders cannot observe all of the CEO's decisions.
D) shareholders sign confidentiality agreements.
E) shareholders require the firm to pay a dividend.

Question 8

Which of the following is a possible disadvantage of a tournament?

A) Competitors have little incentive to help one another (and they may even sabotage each other's work).
B) Workers will stop providing effort as soon as they believe they have no chance to win the prize.
C) Workers may collude to share the prize in order to provide lower levels of effort.
D) The outcome of a tournament may appear to be random.
E) All of the above are possible disadvantages of a tournament.

Question 9

What happens to the piece rate if there is a ratchet effect?

A) It decreases over time.
B) It increases over time.
C) It is replaced with a time rate.
D) It is replaced with a salary contract.
E) It is only paid to the least productive workers.

Question 10

Which of the following is not likely to help a firm motivate its workers to put forth more effort?

A) providing a free or subsidized company gym and/or cafeteria
B) installing monitoring equipment
C) providing competitive year-end bonuses
D) implementing a profit-sharing scheme
E) All of these are likely to motivate workers to put forth more effort.

Question 11

A firm owner wants a manager to make difficult personnel decisions when necessary (which requires firing a worker every now and then) in order to maximize the firm's profits. The manager, however, prefers to not fire anyone. The worker also prefers not to be fired. In this example, who is the principal and who is the agent?

A) The firm owner is the principal. The manager is the agent.
B) The firm owner is the principal. The should-be-fired worker is the agent.
C) The manager is the principal. The firm owner is the agent.
D) The should-be-fired worker is the principal. The manager is the agent.
E) The should-be-fired worker is the principal. The firm owner is the agent.

Question 12

A piece rate compensation system

A) underemphasizes the quantity of output produced.
B) attracts and benefits the most able workers.
C) inherently hurts minorities.
D) decreases a firm's productivity.
E) has no disadvantages.

Question 13

Which of the following statements is false?

A) Profit sharing redistributes profits back to the workers.
B) Bonuses are frequently linked to performance.
C) Bonuses are paid in addition to base salary.
D) Free-riding can result from a compensation scheme that gives competitive individual bonuses.
E) Free-riding can result from profit sharing.

Question 14

Principal-agent problems arise when

A) the principal negotiates contracts on behalf of the agent.
B) the agent negotiates contracts on behalf of the principal.
C) the agent's objectives are different from the principal's objectives.
D) firm owners (the principals) pay employee wages (the agents) based on race.
E) workers (the principals) work harder when the firm owners (the agents) increase wages.

Question 15

Which one of the following statements about piece rate compensation schemes is false?

A) They attract more able workers.
B) They elicit high levels of effort.
C) They are preferred by discriminatory firms.
D) They discourage nepotism.
E) They tie pay to performance.

Question 16

Under a piece rate pay scheme where all workers face different upward-sloped marginal cost curves for providing effort,

A) all workers will provide the same amount of effort.
B) all workers will produce the same amount of output.
C) all workers will be paid the same amount.
D) workers with higher marginal cost curves for providing effort will produce more output than workers with lower marginal cost curves.
E) workers with higher marginal cost curves for providing effort will produce less output than workers with lower marginal cost curves.

Question 17

The idea of linking public school teacher salaries to student outcomes is basically an attempt to impose a ________ compensation scheme on teachers.

A) time rate
B) piece rate
C) tournament
D) profit sharing
E) work-for-pay

Question 18

A firm that finds it extremely expensive to monitor the output of each worker will likely pay its workers

A) with piece rates.
B) with time rates.
C) with incentive pay.
D) according to how much each worker produces.
E) on commission.

Question 19

Which of the following is not true regarding the incentives different pay structures impose on workers?

A) Piece rates are an option when individual output is easily measured by firms.
B) Tournaments can elicit more effort than a time rate.
C) Worker effort can be a function of the pay structure.
D) Worker productivity is unrelated to the pay structure.
E) Profit sharing is a pay structure designed to elicit more effort from workers, but it can suffer from free-riding.

Question 20

To pay piece rates in order to elicit effort, it must be the case that

A) the firm can monitor individual worker output.
B) workers refuse to accept a time rate.
C) firms cannot monitor individual worker effort.
D) the production process relies on group work.
E) the firm does not want to maximize profits.

Question 21

The optimal efficiency wage requires

A) firms to pay the competitive wage.
B) firms to pay any wage above the competitive wage.
C) firms to pay the unique wage above the competitive wage such that the elasticity of output with respect to wages equals one.
D) firms to pay fringe benefits.
E) the total product curve to be downward sloping.

Question 22

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. This equilibrium comes about in part because

A) the firm pays workers according to a tournament.
B) workers are less likely to shirk when there is a pool of unemployed workers who are willing to take their job.
C) the firm agrees to not replace labor with capital.
D) workers are unaware of the pool of unemployed workers as long as they keep their job.
E) workers will do anything to be paid a higher wage.

Question 23

Middle-aged workers being paid more than their younger counterparts is likely due to

A) the natural inverse relationship between age and experience.
B) the implementation of a mandatory retirement age by the firm.
C) more recent education and job training programs being more effective than older programs.
D) firms using a delayed compensation scheme.
E) workers prefer delaying their earnings to as late in life as possible.

Question 24

The bonding critique criticizes the model of efficiency wages because

A) profit-maximizing firms should never be willing to pay more than the competitive wage.
B) workers should be willing to give the firm collateral that the firm would keep if the firm ever caught the worker shirking, and in exchange the worker would be willing to work for a wage less than the efficiency wage.
C) firms cannot issue bonds to pay for labor costs.
D) workers do not know how well the firm can monitor worker effort.
E) worker effort is unrelated to wages.

Question 25

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?

A) Workers prefer wages to increase over time.
B) The firm would fire the worker as soon as the worker's value of marginal product exceeded the worker's wage.
C) Workers would leave the job as soon as the firm tried to pay the worker less than his or her value of marginal product.
D) The firm would need to enforce a mandatory retirement age, which is illegal in the United States.
E) The workers would never have an incentive to invest in general training.

Question 26

One piece of evidence in favor of the efficiency wage model is that some sectors of the economy pay relatively high wages, whereas other sectors pay lower wages. This supports the efficiency wage model as it seems to provide evidence of what?

A) Dual labor markets exist.
B) There are compensating differentials being paid depending on the type of work being done.
C) Unemployment is constant across sectors.
D) High-wage firms take advantage of delayed-compensation contracts.
E) Workers voluntarily provide bonds in case they are caught shirking.

Question 27

What prevents a firm from offering a delayed-compensation scheme to its employees and then firing each worker when the worker's wage exceeds his or her value of marginal product?

A) Firms that offer delayed-compensation schemes are legally barred from firing workers.
B) Profits would increase by allowing the worker to continue on.
C) The worker will have already retired by the time the worker's value of marginal product exceeds his or her wage.
D) Profits are insensitive to when the worker quits his job.
E) The firm would lose the trust of the workers, and new workers would not accept the payment scheme.

Question 28

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,

A) the efficiency wage will fall.
B) the number of shirking workers will fall.
C) firm profits will fall.
D) the firm will monitor less.
E) the pool of involuntarily unemployed workers will increase.

Question 29

Which is not true regarding a delayed-compensation contract?

A) It discourages workers from shirking.
B) It decreases employee turnover within the firm.
C) An effective one requires a mandatory retirement age.
D) It necessarily costs more in labor costs than a time rate system.
E) It is associated with an upward-sloping age-earnings profile.

Question 30

An efficiency wage is defined as

A) a wage above the competitive wage that elicits greater effort on the part of workers.
B) a wage below the competitive wage that elicits greater effort on the part of the workers.
C) any wage scheme that is accepted by the union.
D) any wage scheme that pays different workers different wages.
E) any wage scheme that pays all workers the same wage.