Financial Compensation and Motivationn
Economics of Human Resources
Part 4: Financial Compensation and Motivation
Lecture 1: introduction - effort
Firms must pay workers to perform tasks that they would not otherwise perform. This is not as straight forward as it seems. We can readily observe a wide variety of compensation schemes that firms use to induce their workers to perform. When is it appropriate to use one particular compensation method instead of another?
Note: In previous lectures, we talked about choosing between paying a straight salary or paying a piece rate but the only issue that we considered was sorting when workers have asymmetric information about their abilities. Now we will examine the implications of various payment schemes on the productivity of any given type of worker, where productivity is (at least to some degree) under the control of the worker.
Two general types of compensation systems are 1) salaries and 2) output-based pay. A salary is defined as payment by input, while output-based pay is defined as payment by a particular measure (or measures) of output.
Salaries are usually tied to some measure of input, which are sometimes rough. For example, an annual salary does not depend on the amount of output that an individual produces in that year, but only that he/she show up for work during most of the work days of that year. For this reason an hourly wage is also defined for our purposes as a salary. An hourly wage does not depend on the worker's output, but rather on the fact that the worker is there on the assembly line or at the word processor during the hour for which ohe is being paid.
Examples of output-based pay include:
Piece-rates: workers earn a certain amount for each item produced
(ex: meat workers are paid per carcass processed, garment manufacturers are paid per article of clothing completed)
Commission: workers receive a proportion of the value of the items they sell (ex: sales persons, cab drivers)
Bonus schemes:
Part 4: Financial Compensation and Motivation
Lecture 1: introduction - effort
Firms must pay workers to perform tasks that they would not otherwise perform. This is not as straight forward as it seems. We can readily observe a wide variety of compensation schemes that firms use to induce their workers to perform. When is it appropriate to use one particular compensation method instead of another?
Note: In previous lectures, we talked about choosing between paying a straight salary or paying a piece rate but the only issue that we considered was sorting when workers have asymmetric information about their abilities. Now we will examine the implications of various payment schemes on the productivity of any given type of worker, where productivity is (at least to some degree) under the control of the worker.
Two general types of compensation systems are 1) salaries and 2) output-based pay. A salary is defined as payment by input, while output-based pay is defined as payment by a particular measure (or measures) of output.
Salaries are usually tied to some measure of input, which are sometimes rough. For example, an annual salary does not depend on the amount of output that an individual produces in that year, but only that he/she show up for work during most of the work days of that year. For this reason an hourly wage is also defined for our purposes as a salary. An hourly wage does not depend on the worker's output, but rather on the fact that the worker is there on the assembly line or at the word processor during the hour for which ohe is being paid.
Examples of output-based pay include:
Piece-rates: workers earn a certain amount for each item produced
(ex: meat workers are paid per carcass processed, garment manufacturers are paid per article of clothing completed)
Commission: workers receive a proportion of the value of the items they sell (ex: sales persons, cab drivers)
Bonus schemes: