Which of the Following Explains Why a Compensation Contract Designed

question 3

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) Generally, an employee's effort and ability are the only two determinants of the employee's performance.
• B) Employers are generally pretty skilled at measuring the aspects of job performance in which they are the most interested.
• C) Workers may choose to concentrate only on the most measurable aspects of job performance at the expense at those aspects that are less easily measured.
• D) Compensation contracts with strong incentives are never efficient in the presence of moral hazard.