Question

The happy workers at Happy Motor Company have been blissfully paid on a salary basis for they last 20 years. The typical employee smiles a lot secure in the notion they their paychecks are very predictable. Recently, however, senior management has decided to put 20% of each worker’s pay at risk. If the company meets or exceeds its profit goal for next year each worker will get 130% of their normal pay. If the company does not meet its profit goal, then each worker gets 80% of normal pay. Use concepts from class to discuss the desirability of this new pay scheme.

Answer 1

There are at least two issues with this scheme:

Firstly, rewarding everybody based on company's performance without any adjustment for the individual's own effort will demoralize the good workers since they will not have enough incentive to work hard.

Secondly, those who don't work hard (freeloaders) will be even more convinced that they don't need to work hard since they are not going to get penalized for their poor performance alone.

Ideally the scheme should be restructured to take into account each invididual's performance while rewarding them.