About promotion tournament as incentive mechanism

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Reference no: EM132307651

1. Which below is NOT true about promotion tournament as an incentive mechanism?

Through competition, it will allow the principal to directly observe effort levels of the agents

Potential risk of counterproductive behavior, such as sabotage among colleagues

Skills may not transfer across levels, so that winners of a lower round tournament need not be the most suitable candidates to higher level jobs

It cannot shelter workers from influences of idiosyncratic (non-shared) random factors

2. Consider the following pay scheme: the worker is paid $1000 per month, plus $200 bonus if he or she is rated as the "Top3 Most Productive Employee of the Month" by colleagues and supervisors. Which statement below is NOT true?

This is a type of pay for performance

The pay scheme shelters the worker from commonly shared random influences, such as macroeconomic conditions, on performance

It is least likely than other pay schemes to result in counter-productive behaviors, such as sabotage among coworkers

Ratings can be influenced by personal relations

3. Which scenario below will likely result in a least effective principal-agent relationship?

The job to be performed by the agent is very simple: the agent only needs to sit on a chair for 5 hours a day; the principal makes money by broadcasting, 5 hours a day, the sitting of the agent (some people seem to derive enjoyment from watching a person sitting on a chair for 5 hours a day), and pays the agent $500 per month for doing that.

The job to be performed by the agent is very simple: the agent only needs to come up with some number of jokes per month; the principal makes money by selling those jokes, and pays the agent each month $20 per joke plus $100.

4. Which pay schemes below are performance-based? Multiple answers may apply.

A CEO is paid an amount equivalent to 0.1% of the firm total capitalization (which is number of outstanding shares multiplied by share price)

A car mechanic at an autoshop is paid $3000 per month; on top of that, everytime he sells a repaired used-car, he is paid half of the difference between selling price and the cost of acquiring and repairing the used-car

A sales person who receives a year-end bonus if the sales volume exceeds a pre-determined level, plus a fixed wage

A pro-surfer is paid an annual salary of $50,000

5. Suppose a project needs to be completed by a team of two, one is an engineer and one a designer. Project completion results in a $1000 reward, which is split between the engineer and the designer evenly. The cost for the designer to work on the project is equivalent to a monetary value of $300. Plus, the designer has a solo project which pays $400 once it finishes in time, but if the designer chooses to work on the collaborative project with the engineer, the solo project will not be completed in time. The engineer enjoys the project and can perform very efficiently. As such, the cost for working on the project is only $100 for the engineer.

The two person team is able to complete the project and receive the $1000 reward, because the total reward exceeds any of the individual costs.

Is this reasoning true?

A) True

B) False

Reference no: EM132307651

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