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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Definitions:

Standard Deviation

A parameter that quantifies the range or distribution of values in a dataset.

Raw Score

The original, unmodified or unstandardized score obtained in a measurement or test.

Z-scores

Standardized scores that measure the distance of a data point from the mean, expressed in terms of standard deviations.

Shaded Area

In graphical representations, the region covered by a pattern or color to emphasize or illustrate specific data areas or values.