Currently XYZ's Compensation System Is Such That Only Top Managers

question 25

Multiple Choice

Currently XYZ's compensation system is such that only top managers receive compensation based on the company's performance, while everybody else in the company receives a fixed salary. Moreover, top managers have full discretion over the launch of new products. Due to the failure of the last three products launched by XYZ, top managers are contemplating modifying the allocation of decision rights concerning new products. What changes would make more economic sense?

• A) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge, and leaving their current compensation scheme unchanged.
• B) Delegating decision rights down the ladder to those employees who are likely to have more specific knowledge, and changing their compensation by awarding them bonuses based on their performance.
• C) Leaving the allocation of decision rights unchanged, but changing the compensation of all the employees by awarding them bonuses based on their performance.
• D) Give themselves good bonuses and reduce benefits for all employees.

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Definitions:

Binding Price Ceiling

A government-imposed limit on how high a price can be charged for a product that is set below the market equilibrium price, causing shortages.

Surplus

A situation in which the quantity of a good or service supplied exceeds the quantity demanded, often leading to a decrease in price.

Ration

The controlled distribution of scarce resources, goods, or services.

Equilibrium Price

Equilibrium price is the market price at which the quantity of goods supplied is equal to the quantity of goods demanded.