Determine the pay structure

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Reference no: EM133770063

Question

Suppose that you are looking to hire an employee (Tim) for your new project and are trying to determine the pay structure. Your expected profits will be largely dependent on how hard Tim works. He can either put in a low level of effort or a high level of effort.

If Tim puts in a low level of effort, it will cost him $70,000 and will mean that your project will have a probability of success equal to 50%.

If Tim puts in a high level of effort, it will cost him $100,000 and will lead to your project having a probability of success equal to 75%. The project is worth $1,000,000 to you if successful but will still be worth $200,000 to you if it fails.

If you chose to pay Tim using a Fixed Payment + Bonus Scheme, how much would you pay him, how hard would he work, and what would his profits be.

Reference no: EM133770063

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