Chapter 11: Career Incentives

Question 1

What are lateral transfers for?

Answer 1

used for improving matching

Question 2

What is sabotage?

Answer 2

when an employee increase their own ranking by lowering others’ ranking

Question 3

What are some remedies for sabotage?

Answer 3

1) incorporating measures of cooperation and sabotage into the performance evaluation & subjective evaluation
2) Broader performance measure (team performance)
3) Hire the right people
4) When cooperation is important, less use of RPE & and reduce the awards based on RPE

Question 4

What is a tournament in terms of a promotional rule?

Answer 4

an extreme promotion rule that promotes a fixed number of best performers, regardless of performance

Question 5

Downsides of outside hiring

Answer 5

1) information asymmetry (winner’s curse)
2) Outsiders lack firm-specific knowledge and skills
3) Lower incentives for internal candidates

Question 6

Benefits of outside hiring

Answer 6

1) ensure quality
2) Bring in specific skills that firm needs
3) Reduce sabotage
4) increase productive efforts when facing external competition

Question 7

How does pay by hierarchical level look like on a graph?

Answer 7

1. compensation rises the higher the hierarchical level
2. variance increases the higher the hierarchical level
3. the graph has a convex shape, which means compensation increases faster

Question 8

T or F. If an employee stays at the same job, the average salary increase is zero.

Answer 8

true

Question 9

What percentage is promotion associated with a real salary increase?

Answer 9

5.8%

Question 10

How common are demotions, and what do they mean implicitly?

Answer 10

0.003%, pretty rare, and it encourages poor performers to look for a new job

Question 11

T or F. Long-term increase in pay from promotion is much larger.

Answer 11

true

Question 12

What is the absolute standard

Answer 12

An extreme promotion rule stating that it will promote all or none whose performance matches some standard

Question 13

What is an advantage of absolute standard?

Answer 13

quality of promoted employees is better controlled

Question 14

What is a disadvantage of absolute standard?

Answer 14

the number of employees promoted is variable

Question 15

What is the advantage of using a tournament in terms of a promotional rule?

Answer 15

number of employees promoted is completely controlled

Question 16

What is the disadvantage of a tournament, in terms of promotional rules?

Answer 16

quality of promotion is variable

Question 17

T or F. The absolute performance evaluation is better if the idiosyncratic(individual) risk is stronger?

Answer 17

true

Question 18

T or F. Relative performance evaluation (RPE) is better if the common risk (n) is stronger

Answer 18

true

Question 19

What is tournament theory?

Answer 19

explains a wage structure in an organization when employee efforts and outputs are difficult to measure, monitoring is costly; wage differences are based on relative differences between individuals

Question 20

What does tournament theory predict?

Answer 20

Larger prize motivates more effort and better performance

The greater effect of extra effort on the change of winning brings greater motivation

Pay grows in a convex manner with a hierarchical level