Topic 6 Pay schemes Flashcards
Draw the curve for optimal fringe benefits. Explain the implications of this to employer and employee
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Draw employers isoprofit curve, explain implications of this.
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What does isoprofit curve show?
combination of wages and fringe benefits that yield the same amount of profits - show much the company can afford and prices of wages and benefits
Draw wage-fringe optimum graph, explain the consequences of these
(hint includes indifference curve)
What causes reduction of price of fringe benefits? What is the impact on the isoprofit curve? What other implications? Draw & explain
- Economies of scale
- Tax advantages
- efficiency
Causes curve to shift outwards.
Worker can attain higher indifference curve, fringe benefits expand. Wage remains the same / increases slightly, but fringe benefits become cheaper
Benefits of tax advantages
From wages you pay tax, from fringe benefits you don’t. (lower monetary payments lead to less taxes)
Benefits of economies of scale
Lower per unit cost for fringe benefits especially when you consider bigger companies
In the USA what happens when you make health insurance tax efficient?
More employers are inclined to take it, especially economies of scale, more makes it cheaper
Benefits of efficiency considerations
Lower turnover to protect training investment with various fringe benefits, less recruitment costs (salary universal, fringe benefits unique). E.g. pensions are popular
Explain principal-agent problem in the context of labor economics. what does this lead to?
Employees objectives conflict with employers, e.g. increase their leisure time by shirking on the job, leading to loss of efficiency and profits
How do you tackle principal-agent problem?
Profit incentives, compensations, performance pay, or monitoring (expensive & ineffective) or pay above market salaries
Draw impact of raise in tackling principal-agent problem, explain implications
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Discuss piece rate as a solution
compensation as a proportion to the number of outputs. Limits shirking. May be difficult to offset, increases income variability forcing firms to pay premiums, difficult if produced in teams, workers may decrease quality for more output & pay
Commission and roalties: discuss
proportion of the value of sales paid to employees. Efficient where work efforts are harder to observe, applies to artists, salespeople. Hard to get the rate right especially with royalties
Bonuses: discuss
payments beyond the annual salary based on personal/company performance factors. One of payments. Can be team or personalised performance bonuses. Individuals may get too comfortable with superiors, teams may make individuals to slack. keep team small..
Discuss profit sharing
system that allocates a proportion of the firms profits to the employees, gives employees incentives to work - more profits to company, more benefits to employee. Free-riders? Evidence: modest positive effect on productivity
Tournament pay - discuss
compensation on relative performance. compensations on scale, encourages all workers work hard. Favors CEO - they are paid more than their MRP
Consider effect of tournament pay on CEOs (pros and cons)
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how can higher wage increase employee productivity?
increases work efforts, improves worker capabilities, increases proportion of skilled worker in the workplace.
What is efficiency wage
Minimises employers wage cost per effective unit of labor employed. Marginal benefit of a higher wage equals the marginal cost of higher wage
Explain Shirking model as efficiency wage theory, basic and implications
Opportunity cost for shirking, fear of losing job with higher wage, employees increase their effort (productivity)
Explain Labor turnover model as efficiency wage theory, basic and implications
Firms increase wage to reduce turnover. The lower turnover increases productivity since more experienced workers don’t quit as often.
Illustrate the increase in labor wages and how it results in increased productivity
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alternatives to reduce shirking:
Piece rates and commissions, bonds which employee loses for negligence, or deferring pay if employee found shirking.
Illustrate the MRP and wage relationship with individuals length of service. Explain implications of this
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Explain pensions & MRP of the individual, why ideal why not ideal, and how pensions solve this mismathc
Older people are paid more than their MRP, and this encourages them to remain in employment, not efficient to the firm. Pensions solve this as generous benefit of pension drives employee out to retirement, costing less to employer. ALso during employment, reduces turnover, as lenght of service equals to more pension.