Suppose the Plant Owners Design an Incentive Scheme for the Plant

question 132

Multiple Choice

Suppose the plant owners design an incentive scheme for the plant manager in which the feasible production level is set equal to output from the previous quarter. The bonus payment is determined by the formula B = 0.2Q_f + 0.2(Q - Q_f) . What potential problems can arise with this scheme?

• A) If Q_f is unusually large, then the manager has little incentive to work hard during the following quarter because Q will likely fall back below Q_f.
• B) If Q_f is unusually small, then the manager will receive a small bonus regardless of their efforts during the current quarter.
• C) The manager has an incentive to underperform and generate a small Q during the current quarter in order to provide a smaller benchmark for performance in the next quarter.
• D) The incentive scheme only depends on current output and does not measure performance relative to feasible production.

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