Econ 308 midtrm 2-2
Terms
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- Gaming
- Occurs when employees are rewarded according to some measured output and yet measured output is not perfectly correlated with frim value leading employees to engage in dysfucntional activities to improve their performance evaluations. EX: cashier cheating the system
- Group incentive plans
- are incentive pay t an employee based on group performance, such as overall profitability of a firm as reflected by stock prices.
- Horizon problem
- short run, objective performance measures can cause employees (especially those about to change jobs or retire) to concentrate their efforts on producing results to reap short term beneftits at the expense of sacrificing long term profit of the firm. Edit Card Card FrontHorizon problem Card Backshort run, objective performance measures can cause employees (especially those about to change jobs or retire) to concentrate their efforts on producing results to reap short term beneftits at the expense of sacrificing long term profit of the firm.
- Informativeness principle
- states that improvement in the precision of measuring employees' effort by incorporation more info of employees' effort reduces the cost of inefficient risk sharing and leads to a more efficient effort choice by employees. The informativeness principal implies that information about other employees'effort and/or output should be included in an incentive compensation contract, i.e a relative performance contract. It also implies that there is a tradeoff between the costs of developing and implenenting better performance measures, and the benefits of improbing effort motivation and more effective risk sharing. Edit Card Card FrontInformativeness principle Card Backstates that improvement in the precision of measuring employees' effort by incorporation more info of employees' effort reduces the cost of inefficient risk sharing and leads to a more efficient effort choice by employees. The informativeness principal implies that information about other employees'effort and/or output should be included in an incentive compensation contract, i.e a relative performance contract. It also implies that there is a tradeoff between the costs of developing and implenenting better performance measures, and the benefits of improbing effort motivation and more effective risk sharing.
- internal labor market
- exists in a firm when outside hiring focuses primarily on filling entry level jobs and most other jobs in the firm are filled from within the firm. firms are more likely to use internal labor markets where specific training of employees is important, e.g stell, chemical industries EX: UPS or the police department
- Job satisfaction at a firm indicated by
- -number of new qualified applicants -the quit rate of existing employees EX:lots of people applying to the company that means the company must be really good, lots of people quitting job company must be bad. ex: walmart and google (good) AIG (bad) Edit Card Card FrontJob satisfaction at a firm indicated by Card Back-number of new qualified applicants -the quit rate of existing employees EX:lots of people applying to the company that means the company must be really good, lots of people quitting job company must be bad. ex: walmart and google (good) AIG (bad)
- Methods to reduce ratchet effect
- -set next year's target based on this year's peer actual performance -introduce more frequenct job rotation at the cost of losing learning curve effect -make a commitment not to change next year's target *the more incentive pay in the employee's compensation package, the more risk the employee bears and the more the firm should spend on measurement of performance.