Mid-Term Exam Personnel Economics November 16, 2007 Rudolf Winter-Ebmer

Mid-term exam -- Personnel Economics --- Rudolf Winter-Ebmer

10 points for each questions. You can answer them in English or German, whatever you like. I would even prefer German, if that increased the “readability”.

Group A

1. A department store pays its salespeople commissions for goods sold. Right now, in addition to a fixed salary, they are paid 10% of their sales above $3000 per day. (“old scheme”). In order to boost sales, the store wants to create a new compensation program in which the commission structure would change to 20% above $5000. (“new scheme”). a. Which scheme provides incentives to work hardest? Why? Provide a graph to support your answer. What should happen to the base salary? b. Which workers prefer the old scheme and which prefer the new? Be specific; there should be numbers that refer to output levels in your answer. c. Why should the firm pay the commission as a percentage of sales and not of profits?

2. Explain the equal compensation principle. Give examples. This principle poses fundamental problems for incentive compensation. What remedies can you think of, a personnel department can use?

3. Your company is hiring new workers. a. For what type of job is an expensive screening procedure of high value, for what types of jobs is it least valuable? Explain each of your principles. b. 10 workers applied for this position, all are from outside. Should you offer to pay the workers for their travel expenses for the interview? What kind of selection of applicants will occur if the applicants have to pay their expenses?

4. A recent productivity study in your firm showed that, on any given day, the output produced by workers who graduated high school is the same as the output of the workers who are high school dropouts. The only difference between high school dropouts and high school graduates is in the turnover rate. High school graduates always stay with the firm for their entire career of 40 years. High school dropouts quit after a year with probability 50%; if they do not quit after a year they always stay for the remaining 39 years of their work-life. Suppose that the interest rate is zero and that the market wage of a high school graduate is $ 28,000 per year, while a high school dropout commands a wage of $24,000. The cost of a quit to a firm is $15,000. What type of labor should this firm hire? Give an explanation for your answer!

5. Analyze the analogy between physical and human capital. How can you understand education and training in the same way as physical capital? What are the differences and what consequences do they have? Explain the concept of firm-specific and general human capital. Who is going to pay for the creation of general human capital and who will get the rewards? Why?

Good luck!