Personnel Economics

Distinction between uncontrollable and controllable risk; compensation should be tied less closely to uncontrollable risks

Controllable risks / uncontrollable risks; higher ratio = broader performance measures

Focused measures may distort incentives; filtering uncontrollable risks often filters controllable ones too

Complements quantitative measures, encourages risk-taking, improves decision-making, supports training and communication

Motivate hard work, attract better employees, introduce risk requiring compensation

Depends on: effort value, sorting importance, risk type, risk aversion, trust, distortion, multitasking, manipulation risk

1. Franchising: good outcome measure, parent sets strategy. 2. Cost-plus: reimburses inputs plus profit. 3. Fixed fee: pays fixed sum for result

1. Evaluate performance, 2. Tie pay to performance, 3. Set total pay level

Best performers (incentive) and high potentials (sorting); conflict if best at current level ≠ best at next level

Encourage cooperation, reward teamwork, add subjectivity, separate rivals, combine measures

Call option: buy stock at set price, Put option: sell stock at set price, Strike price: exercise price

1. Financing (though costly), 2. Commitment (alternatives exist), 3. Lower turnover (targeting may fail), 4. Incentive value (but free rider risk)

Shareholder pressure, product market competition, market for corporate control, board oversight

Inefficient spending, wrong strategies (pet projects), entrenchment (cash hoarding, stacked board)

Keep it simple, stupid!

1. When specialization is neither too great nor too small among team members, 2. When other members' human capital is relevant for task execution

Project teams, quality circles, task forces, mixing by experience, management circles

Lack of coordination (duplication), lack of coordination (lack of focus), lack of leadership, free rider problem

Advantages: easier coordination and monitoring, less free riding. Disadvantages: fewer chances for knowledge transfer and economies of scope

Informal policies or practices or a set of beliefs held by the majority of the group

Creation costs, maintenance/enforcement costs, and possibly higher labor costs

The person who knows best (has the most relevant information)

Team selection starts with a coin toss; problems include chance-determined efficiency and principal-agent issues

Teams offer part of their profit to attract members, which affects team member compensation

Substitutes: computers replace people. Complements: computers enhance human creativity

Organizations where the cost of errors is extremely high, e.g., hospital emergency rooms

Formal operations in regular times (centralized), decentralized structure in high-pressure periods