Question

1. If the output of each worker is easy to monitor, an employer should consider paying

A. piece rates.

B. time rates (hourly wages).

C. efficiency wages.

D. workers using a tournament pay structure.

2. To help solve the principal-agent problem for high level executives, or to encourage athletes to put forward their best effort, an organization will likely pay workers based on

A. piece rates.

B. time rates.

C. efficiency wages.

D. tournaments.

Answer 1

1. Piece-rate pay gives a payment for each item produced – it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. It is one of the direct approaches to getting employees who are able to hard working. The employer should consider to Piece rate payment if the output of the workers are easy to monitor. Therefore the answer will be option A.

2. In the typical employer-employee relationship the employer is the principle and the employee is the agent. Employer wants the worker to work as hard as possible to produce the most output. Employer uses the employment contract to structures how a worker gets paid to try and overcome the principle-agent problem. In order to address the principal-agent problem, the compensation must be linked to the performance of the agent. Tournament theory suggests that workers can be rewarded by their rank in an organization, suggesting why large salaries are given to senior executives: to provide a 'prize' to those who put in enough effort to garner one of the top positions. Therefore, to help solve the principal-agent problem for high level executives, or to encourage athletes to put forward their best effort, an organization will likely pay workers based on Tournament theory. Therefore the answer will be option D.