Managerial Economics

In Class Exercise Twelve - Contracting and Motivating Workers

1.  Explain three ways that a manager is monitored (ways that help stop the manager from shirking).

2.  Consider the following situation:  There are several workers with similar jobs.  For all workers, output depends both on the effort of the worker and on some external condition which is difficult to observe, such as general economic conditions in the relevant area, which has a common effect on all workers.  If conditions are bad, all workers will do relatively worse than if conditions are good, but the performance of any given worker depends on her effort.

Explain why a "contest" for pay might be effective in this situation.  What kind of contest might you set up if you were the manager?

3.  Consider the following situation:  You are a manager in a firm which faces laws that make it very difficult and costly to fire a worker.  Furthermore, your firm is partially funded by taxpayers -- so the firm does not have to "make a profit" to continue in business.  Also, many of the policies of the firm are decided upon by the employees -- who throw a big fit if they are not "made part of the decision process." 

And then -- raises are also partially decided by a "committee" of employees - membership of which is voted on by all of the employees.  There are only a few raises to go around each year and if an employee gets a raise one year -- the committee frowns upon giving him or her a raise the following year ("after all, we have to be fair and give everyone a chance at a raise").  There is some money left in your control for raises that can be given at your discretion -- but these raises aren't real large.

a.  What problems do you see motivating workers?

b.  How might you try to motivate your workers?

c.  If you were a worker in this environment, how might you feel?

d.  What would you say about the probability of efficiency in this firm?  Why?

4.  Your company has discovered that, on average, pay in your company is lower than comparable companies.  Because of this you have lost some good employees to competitors.  You decide to increase pay.  You look at pay by job description.  For example, job description A in your company compared to the same job in another company is 75% of the average for the industry.  Another job description might be 85% of the average.  You do have some areas that are over 100% of the average but not many.  You decide to try to bring everyone in your company up to 90% of the average - at least.  Due to budget concerns you start with the areas that have the lowest % of the average and decide that everyone who is paid below 80% of the average will get a 15% raise to start with.  Your plan is to increase pay in this fashion each year until you reach your goal average.

a.  What problems do you see with this method of raises as a manager who wants to motivate employees and keep the good employees around?

b.  What alternative might you look at?  Any ideas?

5.  Graphically and in words explain why a commission of 20% might initiate more effort from a worker than a commission of 10% (theoretically speaking).