Chapter 13 - Optimal compensation systems. This chapter presents the following content: Internal and external labour markets, seniority and productivity over the lifecycle, superstar wages, mandatory retirement, CEO salaries, tenure, matching offers of raiding firms. | Chapter Thirteen Optimal Compensation Systems Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Internal and external labour markets Seniority and productivity over the lifecycle Superstar wages Mandatory retirement CEO salaries Tenure Matching offers of raiding firms Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Compensation System Features may be peculiar and inefficient Internal labour markets contrary to neoclassical model Explaining these features is new area of of research Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Agency Theory and Efficiency Wage Theory Principal-agent theory Efficient contact Problems monitoring costs asymmetric information Leads to “truth-telling” contracts Efficiency Wages Wages affect productivity Paid according to MPL in the firm Causality can run both ways Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Economics of Superstars VMP reflects the size of the market contribution to the productivity of . | Chapter Thirteen Optimal Compensation Systems Created by: Erica Morrill, Fanshawe College © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Internal and external labour markets Seniority and productivity over the lifecycle Superstar wages Mandatory retirement CEO salaries Tenure Matching offers of raiding firms Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Compensation System Features may be peculiar and inefficient Internal labour markets contrary to neoclassical model Explaining these features is new area of of research Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Agency Theory and Efficiency Wage Theory Principal-agent theory Efficient contact Problems monitoring costs asymmetric information Leads to “truth-telling” contracts Efficiency Wages Wages affect productivity Paid according to MPL in the firm Causality can run both ways Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Economics of Superstars VMP reflects the size of the market contribution to the productivity of others Small skill differences get magnified when large audience can share the cost Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Salaries of CEOs VMP is high if individual improves the productivity of a number of people CEOs of large multinationals responsible for large numbers of customers, employees and suppliers High salaries ensure specific talents are matched with the organization Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Salaries as Tournament Prizes Efficient when executives are ranked according to the relative value of their contribution to the organization Individuals are ranked on the basis of their performance not necessarily their individual productivity Create disincentives discourage cooperation disrupt the performance of competitors Chapter 13- © 2002 McGraw-Hill Ryerson Ltd. Efficient Pay Equality and Employee Cooperation Trade-offs in determining the optimal degree of inequality This differs with situation affect on the output of others different levels or .
