Question

If managers are risk- averse and owners are risk- neutral, will owners benefit
from paying managers using a bonus plan instead of a flat salary? Why
or why not?

Answer 1

Statutory rules of the sound organization includes the providing bonus to its employees. It is given to recognize and reward the each employees who strive to work for the development of the organization. Fair Labors Standard Act (FLSA) in USA prefers to implement the rules to follow in an effective way without ignoring the interest of all employees in any unfair means.

Owners of all the firms should have the normative approach towards employees working in their own firms. Risk-neutral concept is nothing but the concentrating on potential benefit leaving the critical situation of getting loss. Owners of all the firms are prefers only emotional based decision making process rather than selecting the choice of safeguarding their rational interest. Owners adopts very precautionary decision of increasing the good attitude of encouraging employees interest in order to apply it in business strategies.

On Managers side, if they apply risk-averse techniques on sub-ordinates, it will not encourage employees to motivate themselves to work hard to develop the business. On contrary of boss attitude, Managers will concentrate only the safeguarding the risk by recommending less spending huge quantity for providing bonus to the employees. But at the same time, in order to follow the FLSA rules in USA, managers are in the position to release the bonus for the employees instead of giving flat salary for life-long up to their full service in their own country.

But Attitude of Owners wins the confidence of the employees as preference at higher hierarchy fetches only the full attention of providing full bonus amount to the employees. They avoid providing Flat salary on hourly basis. But following the rules of providing bonus on seasonal basis, Managers need to follow the Owners policy of Risk-neutral policy.