BSZ_IM_Ch14_4e - Managerial Economics and Organizational Architecture Instructors Manual CHAPTER 14 ATTRACTING AND RETAINING QUALIFIED EMPLOYEES

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 14: Page 1 CHAPTER 14 A TTRACTING AND R ETAINING Q UALIFIED E MPLOYEES This chapter is the first of two chapters on compensation policy (reward system). It concentrates on how managers design compensation packages to attract and retain qualified employees. It begins by providing a benchmark economic model of employment and wages (the standard competitive model). Subsequently, this basic model is extended to consider the implications of costly information about market wage rates, compensating differentials, investments in human capital, internal labor markets, and the choice between salary and fringe benefits. C HAPTER O UTLINE C ONTRACTING O BJECTIVES T HE L EVEL OF P AY The Basic Competitive Model Human Capital Compensating Differentials Costly Information about Market Wage Rates I NTERNAL L ABOR M ARKETS Reasons for Long-Term Employment Relationships Costs of Internal Labor Markets P AY IN I NTERNAL L ABOR M ARKETS Careers and Lifetime Pay Influence Costs T HE S ALARY -F RINGE B ENEFIT M IX Employee Preferences Employer Considerations The Salary-Fringe Benefit Choice S UMMARY T EACHING THE C HAPTER This chapter contains important material. Since students can understand most of this material by reading the book, we simply highlight the main points from the chapter. We sometimes ask the students questions as a concept check (for example, those at the end of the chapter). We typically don’t assign a separate case for this chapter. However, issues from this chapter surface in a number of cases that we employ to cover the more
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 14: Page 2 general topic of compensation policy (which includes incentive compensation issues). These cases are summarized in our discussion of chapters 15 and 16. Throughout the book we concentrate on incentive and knowledge issues. Another important factor in designing compensation packages is taxes. While a detailed treatment of taxes might be found in an accounting class, we make the following point: Effective tax planning requires the planner to consider the tax implications of a proposed transaction for all parties to the transaction. This is illustrated by asking whether it is best to reimburse an employee $5,000 for travel expenses or to pay a salary supplement. We assume that the tax code allows the employee to deduct personally only 80 percent of travel costs. The employee is in a 30 percent tax bracket. Obviously, if the company is tax exempt it is best to pay the $5,000 which is not taxed at the employee level. The company is indifferent between paying $5,000 in salary or reimbursement (ignoring payroll taxes, etc.). Things are different if the firm is in a 40 percent tax bracket and can deduct only 80 percent of the travel costs. Here it is best for the company to pay salary, which it fully deducts, and have the
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.

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BSZ_IM_Ch14_4e - Managerial Economics and Organizational Architecture Instructors Manual CHAPTER 14 ATTRACTING AND RETAINING QUALIFIED EMPLOYEES

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