Question 1

Asymmetric information is most closely related to:
A) deferred compensation.
B) the principal-agent problem and monitoring of workers.
C) up-or-out rules.
D) the 1/n problem.

Accepted Answer

Asymmetric information is directly related to the principal-agent problem and the monitoring of workers because it occurs when one party (the agent) has more or better information than the other (the principal), often leading to issues such as moral hazard and adverse selection. This necessitates monitoring efforts by the principal to mitigate the risks associated with the information asymmetry.

Question 2

All of the following are potential problems with inequality in the pay structure, except that:
A) It may not be attractive to workers with risk-averse preferences.
B) It can discourage free-riding behaviour on the part of workers, thus providing incentives to work more diligently.
C) It can discourage cooperative behaviour and teamwork.
D) It can encourage sabotage that prevents other employees from being promoted.

Accepted Answer

Inequality in the pay structure can indeed discourage free-riding behavior because when workers are paid based on performance, they are incentivized to contribute more individually to avoid being the less productive member. This contrasts with the other options, which are negative consequences of pay inequality.

Question 3

Consider a deferred compensation scheme. Which of the following describes the wage productivity profile?
A) A wage curve below the productivity curve during the early stages of the career, and the opposite situation at the later stages of the career
B) A wage curve that coincides with the productivity curve during all phases of the career
C) A wage curve above the productivity curve during the early stages of the career, below the productivity curve during the middle stages of the career, and above it again during later stages of the career
D) A wage curve above the productivity curve during the early stages of the career, and the opposite situation at the later stages of the career

Accepted Answer

In a deferred compensation scheme, employees are paid less than their productivity in the early stages of their careers and more than their productivity in the later stages. This creates a wage curve that is below the productivity curve early on and above it later in the career.

Question 4

Congratulations! You have just been hired as the director of human resources for the Hiram N. Firem corporation. Until now, this firm has typically hired labour in an unfettered, ultra-competitive labour market. It has always paid competitive wages, but has always laid off workers at the first sign of a downturn in product demand and hired them at the first sign of an upturn. Some might call this the disposable labour model, but in technical jargon, it is called a spot market. Now the management is considering modifying its compensation and lay-off practices.
• The first question that you must address is how the executives should be paid. Until now, they have received stratospheric compensation compared to the rank-and-file workers. Explain this phenomenon by appealing to the salary-as-a-tournament-prize approach of the economists Lazear an Rosen.
• In establishing the pay structure within an organization, trade-offs are involved in determining th optimal degree of inequality of pay. Explain the nature of this trade-off: what factors push toward salary compression, and what factors push toward greater dispersion?
• Now it is time to time to develop a wage/seniority policy for the rank-and-file workers. You are t analyze a deferred compensation system. Give a graph and a brief economic explanation of the wage productivity, and seniority profile. Explain the rationales for deferred compensation.
• Finally, explain the link between a deferred compensation mechanism and the policy of mandator retirement.

Accepted Answer

The answer of Congratulations! You have just been hired as...

Question 5

Which of the following is true of banning mandatory retirement?
A) It reduces the continued employment of older workers.
B) The wages of younger workers will fall and the wages of older workers will rise further.
C) It may reduce the employment and promotion opportunities of younger workers.
D) It has postponed the age of retirement, except for university professors.

Accepted Answer

Mandatory retirement bans can lead to reduced employment and promotion opportunities for younger workers because older workers may choose to stay in their positions longer, thereby limiting the openings available for younger individuals to move up or into the organization.

Question 6

Which of the following is a rationale against mandatory retirement?
A) It is a form of age discrimination.
B) It adds uncertainty to one's life without a specific date of the retirement.
C) It improves the viability of the public and private pensions.
D) It increases the monitoring costs of employer for older workers.

Accepted Answer

Mandatory retirement can be seen as a form of age discrimination because it forces employees to retire based on their age rather than their ability or performance.

Question 7

Deferred compensation systems are those that contain:
A) wages above the level of an individual's marginal product of labour for more senior employees.
B) pensions accruing even after requirement.
C) pension benefits.
D) wages that are paid upon completion of the job.

Accepted Answer

The answer of Deferred compensation systems are those that contain:
A)...

Question 8

Deferred compensation reduces which of the following?
A) The need for constant, everyday monitoring of the marginal productivity of workers
B) The need for mandatory retirement
C) The need to provide incentive pay
D) The need to examine the past performance of a worker before hiring him/her

Accepted Answer

Deferred compensation reduces the need for constant, everyday monitoring of the marginal productivity of workers because it provides an incentive for workers to stay with the company and work hard.

Question 9

Which of the following might be tempered or reduced by the negative ramifications of excessive inequality?
A) Mandatory retirement
B) Compensation by the piece
C) Executive compensation
D) Deferred compensation

Accepted Answer

Executive compensation might be tempered or reduced by the negative ramifications of excessive inequality, as high levels of inequality can lead to social unrest, pressure for regulatory changes, and demands for more equitable pay structures.

Question 10

Which of the following regarding "deferred payments" is NOT correct?
A) Workers' productivities rise with seniority.
B) Workers' wages normally rise with seniority.
C) Deferred payment reduces monitoring costs.
D) Deferred payment reduces turnover.

Accepted Answer

Deferred payments refer to a compensation structure where part of an employee's salary or benefits is paid out at a later date rather than immediately. This concept is often used to incentivize long-term employment and loyalty to a company. The statement that workers' productivities rise with seniority (A) is not inherently related to the concept of deferred payments. While it's true that in some cases, workers' productivity may increase with experience and seniority, this is a general statement about workforce dynamics and not a direct consequence or characteristic of deferred payment systems. Deferred payments are more directly related to reducing turnover (D) and monitoring costs (C), as they encourage employees to stay with a company longer and reduce the need for close supervision by aligning employee interests with those of the employer. Workers' wages normally rising with seniority (B) can be a result of many factors, including deferred payments, but is not incorrect in the context of discussing deferred payments.

Question 11

Which of the following is paid at the piece rate?
A) Medical doctors
B) University professor
C) Fire fighters
D) Auto workers

Accepted Answer

The answer of Which of the following is paid at...

Question 12

The basic idea that underlies the theory of salaries as tournament prizes is that:
A) Workers are paid according to the 1/N rule of compensation.
B) Workers are paid according to their rank in a classification of the own, individual performances.
C) Workers are paid according to the average revenue product of individuals within a class of workers.
D) Workers are paid according to their own, individual values of marginal revenue product.

Accepted Answer

The theory of salaries as tournament prizes posits that compensation is based on the relative performance or rank of individuals within an organization, rather than on their absolute level of output or productivity. This encourages competition among employees for higher ranks and the associated rewards.

Question 13

The "lump-of-labour-fallacy" implies that:
A) The number of jobs at each firm depends on the state of the overall labour market.
B) The only way that an unemployed person can find work is for total employment to rise.
C) Work-sharing arrangements will not create any jobs.
D) The only way that an unemployed worker can find work is for someone who is currently employed to leave his/her position.

Accepted Answer

The "lump-of-labour fallacy" is the mistaken belief that there is a fixed amount of work in the economy, implying that one person can only gain employment if another loses theirs.

Question 14

Linear pay structures are those that award additional earnings evenly according to every unit of productivity or widget produced, while non-linear pay structures award additional earnings in very uneven fashion based on job categories that are ranked. Which of the following statements is false?
A) The non-linear pay systems occasionally generate disincentives for good performance.
B) The non-linear pay systems are thought to stimulate good performance.
C) The non-linear pay systems can generate non-cooperative behaviour.
D) The non-linear compensation systems tends to generate relatively egalitarian pay structures.

Accepted Answer

Non-linear compensation systems, by definition, create uneven pay structures based on job categories and performance, which is the opposite of generating egalitarian (equal) pay structures. Linear pay structures are more likely to result in egalitarian outcomes.

Question 15

One of the ways in which employees do not benefit from deferred compensation is:
A) the due process and seniority rules.
B) the periodic rather than the everyday monitoring.
C) the possible synchronization of the worker's income and expenditures.
D) the remuneration according to the worker's true contribution to the firm.

Accepted Answer

Deferred compensation does not necessarily ensure that remuneration aligns with the worker's true contribution to the firm, as it may be influenced by other factors such as company performance or tenure.

Question 16

An example of "piece rate" compensation is:
A) fee for service compensation.
B) executive compensation.
C) raiding and offer-matching compensation.
D) straight-salary compensation.

Accepted Answer

Piece rate compensation refers to a pay system where workers are paid based on the amount of work they complete or the number of units they produce, which aligns with the definition of fee for service compensation. This system is commonly used in manufacturing and other industries where output can be easily quantified.

Question 17

Principal-agent theory deals with the problem of:
A) designing an efficient contract between the employer and the employee when there are incentives to cheat or shirk.
B) failed negotiations between workers and their employees.
C) designing an optimal compensation when there is perfect information.
D) designing an optimal compensation system to reduce turnover.

Accepted Answer

Principal-agent theory primarily addresses the issues that arise in situations where there is an asymmetry of information and differing objectives between a principal (such as an employer) and an agent (such as an employee), including the challenges of designing contracts that align the interests of both parties and mitigate the risks of shirking or dishonest behavior.

Question 18

Which of the following is not the rationale for mandatory retirement?
A) An employment contract should have a termination date when the productivity level of the employee is way below the paying wage of the employee.
B) Mandatory retirement may increase the need for the monitoring and evaluation of older workers.
C) Mandatory retirement may create a greater degree of certainty about when an employee will retire for future production planning.
D) Mandatory retirement can open up opportunity for younger workers.

Accepted Answer

Mandatory retirement is typically justified by reasons such as ensuring a predictable turnover of staff, making room for younger workers, and aligning retirement with the expected decrease in productivity as one ages. It is not implemented to increase the need for monitoring and evaluation of older workers; rather, such measures are often seen as a way to avoid mandatory retirement by assessing actual performance instead.

Question 19

Which of the following do not apply to "superstar" salaries?
A) They are astronomical compared to even the salary of the second best performer.
B) A premium is paid even if the star is only a marginally better performer than the second best person.
C) They resolve the principal-agent problem.
D) They magnify small differences in skill into large differences in pay.

Accepted Answer

The principal-agent problem refers to the difficulties in motivating one party (the agent) to act in the best interests of another (the principal) rather than in his or her own interests. Superstar salaries do not inherently resolve this issue; they are more about compensating perceived value and marketability rather than aligning interests or motivations between parties.

Question 20

What is the essence of efficiency wages?
A) Wages are determined by a bargaining process between the worker and the firm.
B) Wages may affect the productivity levels.
C) Wages are always paid according to the worker's marginal revenue product.
D) Wages are paid such that the allocation of labour is efficient.

Accepted Answer

Efficiency wages are based on the idea that paying workers more than the market-clearing wage can lead to increased productivity. This can happen through various mechanisms, such as increasing worker effort, reducing turnover, or attracting higher-quality applicants.

Quiz 13: Optimal Compensation Systems, Deferred Compensation, and Mandatory Retirement

Asymmetric information is most closely related to:

All of the following are potential problems with inequality in the pay structure, except that:

Consider a deferred compensation scheme. Which of the following describes the wage productivity profile?

Which of the following is true of banning mandatory retirement?

Which of the following is a rationale against mandatory retirement?

Deferred compensation systems are those that contain:

Deferred compensation reduces which of the following?

Which of the following might be tempered or reduced by the negative ramifications of excessive inequality?

Which of the following regarding "deferred payments" is NOT correct?

Which of the following is paid at the piece rate?

The basic idea that underlies the theory of salaries as tournament prizes is that:

The "lump-of-labour-fallacy" implies that:

Linear pay structures are those that award additional earnings evenly according to every unit of productivity or widget produced, while non-linear pay structures award additional earnings in very uneven fashion based on job categories that are ranked. Which of the following statements is false?

One of the ways in which employees do not benefit from deferred compensation is:

An example of "piece rate" compensation is:

Principal-agent theory deals with the problem of:

Which of the following is not the rationale for mandatory retirement?

Which of the following do not apply to "superstar" salaries?

What is the essence of efficiency wages?