User:Aidanvm1997

Lecture 7:

Why do people choose to be employed?

 * General Living: Need money, pay bills, cost of living
 * Maslow's Hierarchy of Needs:
 * Psychological needs,
 * 1) Satisfaction in work, enjoy the work, safe and fun environment
 * 2) Power, people want to feel important
 * self-fulfilment needs,
 * 1) Identity, if you have inheritance you do not need to work but you still want to work to feel involved.
 * 2) Social aspect, instead of staying home all day living off inheritance
 * Maslow's hierarchy of needs stipulates that people first seek safety, then satisfaction and finally self-fulfilment. Work can cover these different levels of needs through providing salary and job security (safety), a fun environment to work with people you like (satisfaction) and finally, a sense of collective identity with the people you work with and the employer (self-fulfilment).

What can managers do to motivate and retain employees?

 * Bonuses, promotion (monetary rewards)
 * Non-monetary rewards - extra annual leave, recognition to managers
 * 1) Problems:
 * Misaligned incentives lead to adverse selection (what agents do I hire?) and moral hazard (How do I motivate agents?)

Gift-exchange theory:

 * For the worker, the gift is working more than the minimum standard. On the firm’s side, the gift is paying wages in excess of what they could do elsewhere.
 * Lab experiments support this theory, however, the market has excess supply of labour, employees have little incentive to raise the quality of work above what they are paid. If there is no incentive for the employee to raise their work level, there is no incentive for the employer to raise their wages.
 * If there is an excess in labour in the market, there is incentive for the worker to produce good work, or else the threat is unemployment. For the employer, however, there is no incentive to raise the wages as they can always hire a unemployed person who would appreciate being employed.

Gift-exchange experiments:

 * Theory: On average a higher wage is reciprocated with a higher amount of effort from the employee
 * 1) Hidden Costs:
 * If the boss has distrust in the employee’s motivations it can have a negative impact on their motivation to work well

Pay for performance:

 * Can improve work effort, however, can be costly depending on the cost of measuring performance
 * Competition and worker selection
 * Highly motivated workers switch jobs to employers who pay higher wages
 * Encounters challenges where you can not define the performance quantitatively, or there are certain parts of the job which are not measured in the KPI's.

==CEO pay:
 * CEO’s are paid based on the firm performance, normally on that years revenue
 * Little differences in productivity can drastically change total output, due to economies of scale
 * Therefore, the best firm should get the best CEO, second best firm gets second best CEO, and so on.
 * The pay of the CEO is based on the size of the firm and scarcity of talent
 * W(n) = D(n*) S(n*)1-b S(n*)b
 * There are still the same problems for the CEO as all workers, because the CEO is paid based on the firms performance their motivation might not be inline with the companies vision. If a CEO is entirely paid on the firms performance they can make decisions with that goal in mind. ie, they could encourage unhealthy competition amongst employees to achieve goals, or they could engage in fraudulent behaviour in order to increase revenue. This example was seen at the investment bank Lehman Brothers, where all employees were paid based on performance and were encouraged to commit fraud in order to increase the money they made.

Economics of Superstars:

 * Power economics implies that a small difference in talent gives rise to very large differences in pay, differences in talent are small and bounded, but gains are large and unbounded
 * When very large firms compete to hire the services of a CEO, small differences of talent give rise to large differences in pay
 * The same logic applies to other markets with superstars, athletes and artists
 * This theory can be seen in many professional sporting teams, if a team has a "superstar" they have a better chance of winning a championship, the difference between coming 1st or 2nd in these competitions results in massive amounts of money in sponsorships and ticket sales. Therefore, the "superstars" are offered massive contracts by teams in order to win championships.

Unintended consequences of ‘pay for performance’:

 * Shift of effort from long-term goals to short term gains through focus on incentivised tasks rather than unincentivized tasks
 * Extrinsic values (money) can crowd-out intrinsic values (customer satisfaction)
 * Competition among employees can become detrimental to the overall team structure
 * This example is prevalent in sales based jobs - if there are KPI's which the sales person is paid on they will not focus on customers who will not buy anything. As well as this, competition among employees will result in a toxic work culture which will reduce customer satisfaction.

Tournament Theory:

 * Why do employees get a pay rise when they get a promotion?
 * Not because the job is harder but because they are working at a more productive way, the increase in pay is a reward for being more productive
 * Many firms are not innovators or new technology, as a result they focus on how they can reduce their costs. Increasing productivity is an easy way to reduce costs to the firm and is therefore heavily encouraged and incentivised.

Team Production:

 * Why do we use teams when it leads to the free-rider problem?
 * 1) Many projects require multiple skills that single individuals don’t posses
 * 2) In rapid changes in technology it can make it difficult for one person to have and absolute advantage in everything
 * 3) Teamwork required communication, which can involve both common jargon and personal knowledge of each other
 * In all teams there is shirking, social loafing is the theory which explains as a team gets larger, the amount of shirking increases. However, teams are still utilised by many businesses. The goal of the firm is to have the productivity of the team outweigh the amount of shirking. Specifically in high technology industries where multiple experts are required.