Which of the Following Explains Why a Compensation Contract Designed

question 40

Multiple Choice

Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?

• A) If performance depends on factors other than just the employee's effort, the strong incentives create large costs associated with risk bearing.
• B) Employers are generally pretty skilled at measuring the aspects of job performance in which they are the most interested.
• C) Generally, an employee's effort and ability are the only two determinants of the employee's performance.
• D) This is a trick question; in the presence of moral hazard, even a poorly-designed incentive scheme is better than no incentive scheme.

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Definitions:

Emotional Intelligence (EQ)

The ability to understand, use, and manage your own emotions in positive ways to relieve stress, communicate effectively, empathize with others, and overcome challenges.

Self-Awareness

The conscious knowledge of one's own character, feelings, motives, and desires, considered crucial for emotional intelligence.

Self-Management

The ability to manage one's own activities and responsibilities effectively, often without direct supervision.

Self-Esteem

An individual’s overall subjective emotional evaluation of their own worth or value.