Bài giảng Labour Market Economics - Chapter 13 Optimal Compensation Systems

Chapter ThirteenOptimal Compensation Systems Created by: Erica Morrill, M.Ed Fanshawe CollegeChapter 13-1© 2002 McGraw-Hill Ryerson Ltd.Chapter FocusInternal and external labour marketsSeniority and productivity over the lifecycleSuperstar wagesMandatory retirementCEO salariesTenureMatching offers of raiding firms2© 2002 McGraw-Hill Ryerson Ltd.Compensation SystemFeatures may be peculiar and inefficientInternal labour markets contrary to neoclassical modelExplaining these features is new area of of research3© 2002 McGraw-Hill Ryerson Ltd.Agency Theory and Efficiency Wage TheoryPrincipal-agent theoryEfficient contactProblemsmonitoring costsasymmetric informationLeads to “truth-telling” contractsEfficiency WagesWages affect productivity Paid according to MPL in the firmCausality can run both ways4© 2002 McGraw-Hill Ryerson Ltd.Economics of SuperstarsVMP reflects the size of the market contribution to the productivity of othersSmall skill differences get magnified when large audience can share the cost5© 2002 McGraw-Hill Ryerson Ltd.Salaries of CEOs VMP is high if individual improves the productivity of a number of peopleCEOs of large multinationalsresponsible for large numbers of customers, employees and suppliersHigh salaries ensure specific talents are matched with the organization6© 2002 McGraw-Hill Ryerson Ltd.Salaries as Tournament PrizesEfficient when executives are ranked according to the relative value of their contribution to the organizationIndividuals are ranked on the basis of their performance not necessarily their individual productivityCreate disincentives discourage cooperationdisrupt the performance of competitors7© 2002 McGraw-Hill Ryerson Ltd.Efficient Pay Equality and Employee CooperationTrade-offs in determining the optimal degree of inequalityThis differs with situationaffect on the output of othersdifferent levels or structuresperson’s nature8© 2002 McGraw-Hill Ryerson Ltd.Up-or-Out RulesMay be efficient given imperfect and asymmetric informationforces employers to promote skilled workersallows new workers in junior spotsenables employers to remove disgruntled employeescompels managers to make hard decisions9© 2002 McGraw-Hill Ryerson Ltd.Raiding, Offer-MatchingWinner’s Curseraiding other organizations for top talentencourages offer-matching if employee is worth the amountMitigating circumstances10© 2002 McGraw-Hill Ryerson Ltd.Piece RatesPositive work incentive effectsRewarded directly for producing more outputMeasuring and monitoring issues11© 2002 McGraw-Hill Ryerson Ltd.Executive CompensationMotivated by the need to pay “prizes” to top person Induce incentives to “win the tournament prize”Executive with the right talent matched with the organization that needs and values that talent 12© 2002 McGraw-Hill Ryerson Ltd.Deferred WagesWages are above productivity for senior employeesEven larger if consider pensionsExist in firms with long-term commitment to continue contract13© 2002 McGraw-Hill Ryerson Ltd.Rationales for Deferred CompensationEnsure honesty and work effortReduce need for daily monitoringReduce turnoverProvide workers with financial interest in the firm14© 2002 McGraw-Hill Ryerson Ltd.Rationale for Mandatory RetirementTo enable deferred wagesprovides the termination date for contractual arrangements with deferred wagesFacilitate worksharing opening up promotion and employment opportunitiesCertainty for planning new staff, pension obligations and medical and health expenditures15© 2002 McGraw-Hill Ryerson Ltd.Figure 13.2 Mandatory Retirement AgeWage, productivityW, wageVMP, productivityMRAge16© 2002 McGraw-Hill Ryerson Ltd.Arguments Against Mandatory RetirementAge discriminationEmployment standards and human rights legislation does not cover workers over 65Improve the viability of public and private pensions17© 2002 McGraw-Hill Ryerson Ltd.End of Chapter Thirteen18© 2002 McGraw-Hill Ryerson Ltd.