## CH10 – Pay for Performance 1. [[Chapter 10#Principal-Agent Problem|Principal-Agent Problem]] 2. How Incentives Matter - Reasons underlying incentive design - Analyze consequences of specific incentive schemes 3. [[Chapter 10#Designing Incentive Compensation|Designing Incentive Compensation]] - Focus: [[Chapter 10#Strength of Incentives|Strength of Incentives]] - [[Chapter 10#Adverse Effects of Strong Incentives|Adverse Effects of Strong Incentives]] 4. [[Chapter 10#Factors Affecting Incentive Strength|Factors Affecting Incentive Strength]] - Accuracy of performance evaluation - Value of employee effort - Importance of sorting - Risk aversion - Subjective evaluation and trust 5. [[Chapter 10#Multitask Incentives|Multitask Incentives]] & [[Chapter 10#Incentive Compensation in Complex Jobs|Incentive Compensation in Complex Jobs]] 6. [[Chapter 10#Types of Reward Structures|Types of Reward Structures]] - When to use each structure - Pros and cons of each 7. The Ratchet Effect --- ## CH11 – Career-Based Incentives 1. [[Chapter 11#Pay by Hierarchical Level|Pay by Hierarchical Level]] - Salary changes by job type: promotion, demotion, lateral transfer - How pay changes by hierarchical level (graph-based understanding) - Long-term career prospects as a source of incentives 2. [[Chapter 11#Promotion Rules|Promotion Rules]] - Tournament vs. Absolute Standard - Pros and cons of each 3. [[Chapter 11#Relative vs Absolute Performance Evaluation|Relative & Absolute Performance Evaluation]] - Role of uncontrollable risks (prefer measure with less uncontrollable risk) - Incentive distortion: sabotage - Remedies to prevent sabotage from relative performance evaluation 4. [[Chapter 11#Promotion and Incentives|Promotion and Incentives]] - How effort, evaluation, and rewards are tied together - Tournament Theory – content and predictions 5. [[Chapter 11#Internal vs External Hiring|Internal vs External Hiring]] --- ## CH12 – Options and Executive Pay 1. [[Chapter 12#Basics of Stock Options|Basics of Stock Options]] - Call option vs. put option - Option valuation: intrinsic value and Black-Scholes approach - Be able to calculate intrinsic value; compare with Black-Scholes value 2. [[Chapter 12#Employee Stock Options|Employee Stock Options (ESO's)]] - [[Chapter 12#Characteristics Compared to Exchange-Traded Options|Characteristics vs. Exchange-Traded Options]] - Vesting period (typically 3–5 years) - Not tradable - Forfeited if employee leaves - Why ESO value ≠ market-traded option value - Risk aversion - Non-tradable - Undiversified - Forfeiture risk - Cost of issuing ESOs: accounting vs. economic perspective - [[Chapter 12#Why Give Employees Options|Why Give Employees Options]] 3. [[Chapter 12#Executive Compensation|Executive Compensation]] - [[Chapter 12#Executive Compensation|CEO pay debate – are CEOs paid too much?]] - Median worker wages (flat after inflation) vs. CEO pay (exponential growth) - Role of stock options in CEO pay increase - [[Chapter 12#CEO Pay Debate|Views on executive pay]] - Principal-agent view - Rent extraction view - Alternative explanations: market forces; compensation disclosure & wage comparison - [[Chapter 12#Reforms|Reforms]] --- ## CH3 – Training 1. Human Capital and Human Capital Theory 2. Age-Earnings Profiles - Earnings rise over the life cycle - Earnings increase at a decreasing rate (flatter with age) - Earnings increase faster for more educated workers 3. General vs. Firm-Specific Human Capital; general vs. firm-specific training 4. Who Pays for Firm-Specific Training? - Holdup problem - Firms and workers split investment and returns 5. Implications of On-the-Job Training - Turnover costs to firm and worker - Workers invest in FSHC when match is good and turnover is low - Compensation rises with FSHC - Firm size: more FSHC investment in larger firms 6. Relationship-Specific Investment - Definition: no value if relationship ends - Holdup problem as main concern --- ## CH4 – Turnover 1. Bidding for Employees - Asymmetric information & firm-specific knowledge - When is raiding worthwhile? - Raider must be certain target worker's value exceeds current firm's value - Current firm does not overvalue/overpay the worker --- ## CH5 – Decision Making 1. Market Metaphor for Organizational Design - Use market mechanisms internally where practicable - Good design: uses local knowledge, encourages coordination, provides incentives, encourages innovation 2. Benefits of Centralization vs. Decentralization 3. Specific Knowledge vs. General Knowledge --- ## CH9 – Risks & Performance Evaluation 1. Performance Evaluation - Quantitative performance measures - Five properties: risk profile, distortion, manipulation, scope, match to job design - Implications for incentives - Subjective evaluation - Typical problems - Why we use it - How to avoid typical problems - Performance evaluation design - Steps involved - Questions to ask when evaluating a performance measure