Question

Baseball, like other types of entertainment, often provides massive compensation packages to star employees. The justification cited is that, even though an employee who is “almost as good” can be hired for a fraction of the amount paid for a star, the value of having the best can make the expenditure worthwhile. Please explain briefly ( this question is related to chapter 5 production function)

a) Does this seem fair?

b) Would it make sense to cap the compensation that can be paid to star employees at some multiple of the lowest paid employee?

c) What effect do you think this would have on entertainment revenues?

Answer 1

Solution:

In every businesses,we know that labour is being one of an important factor of production. Here in this case, star employees are those defined under their labour productivity. These category of employees will be having better productivity compared to the rest of the employees. So here these group of employees are an asset to the business organisation itself. Therefore,it is very important to keep the star employees in the company by treating well (by way of providing high compensation packages)

a) Regarding the fairness of the act, The massive compensation to star employees is defined based on their increased productivity from rest of the employees. According to economics, every businesses aims at increasing their profit and efficiency. So it is important to the business to keep those employees in the organisation.

b) capping the compensation that is paid to star employees at some multiple of lowest paid employees actually reduce the cost of business. At the same time ensures that the star employees are paid high.

c) There will be a positive effect on the entertainment revenues because it is rational to invest in highly productive factors (star employees). As star employees have the potential to increase and maintain the revenue of the businesses,it is rational to give fair treatment to those assets (star employees).