Why, in the labor market, are contracts often designed to include a variable salary component that is tied to some measure of performance?
A) Such contracts are considered the fairest to employees under fair labor standard laws.
B) Most people are risk-averse and thus variability in their compensation leads to higher total utility.
C) Firms use such contracts to differentiate between high- and low-quality workers.
D) These contracts tend to attract employees with the lowest probability of switching jobs.

Question

Quizplus · Accepted Answer

Firms use performance-based variable salary components as a mechanism to differentiate between high- and low-quality workers. This approach incentivizes higher performance, as employees know their compensation is directly tied to their output or success, effectively aligning the interests of the employees with those of the firm.

Why, in the Labor Market, Are Contracts Often Designed to Include