BSZ_IM_Ch16_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 16: Page 1 CHAPTER 16 I NDIVIDUAL P ERFORMANCE E VALUATION This chapter is the first of two chapters on performance evaluation. It focuses on the evaluation of an individual employee’s performance. To organize the discussion, the chapter uses the principal-agent model introduced in chapter 15. This model makes a number of simplifying assumptions that reduce the complexity of measuring individual performance. The chapter analyzes the issues that arise in relaxing these assumptions. Primary topics include estimating a performance benchmark, multiple performance measures, opportunism, measurement costs, subjective performance evaluation, government regulation of labor markets, combining objective and subjective performance measures, and evaluating teams. An appendix provides a more detailed analysis of determining the optimal weight in a relative-performance contract. C HAPTER O UTLINE S ETTING P ERFORMANCE B ENCHMARKS Time and Motion Studies Past Performance and the Ratchet Effect M EASUREMENT C OSTS O PPORTUNISM Gaming Horizon Problem R ELATIVE P ERFORMANCE E VALUATION Within-Firm Performance Across-Firm Performance S UBJECTIVE P ERFORMANCE E VALUATION Multitasking and Unbalanced Effort Subjective Evaluation Methods Problems with Subjective Performance Evaluations C OMBINING O BJECTIVE AND S UBJECTIVE P ERFORMANCE M EASURES T EAM P ERFORMANCE Team Production Evaluating Teams G OVERNMENT R EGULATION OF L ABOR M ARKETS S UMMARY A PPENDIX : O PTIMAL W EIGHTS IN A R ELATIVE P ERFORMANCE C ONTRACT
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 16: Page 2 T EACHING THE C HAPTER We begin by highlighting the major points in the chapter and emphasize the following topics: Establishing a performance benchmark, explicit versus subjective evaluation, and relative-performance evaluation. We assign the appendix to the chapter and the appendix problem. The appendix material is relatively difficult. Lectures supplement the appendix. We begin by emphasizing the basic rationale for relative- performance evaluation. We help the student through the analysis in the appendix, then summarize some of the drawbacks with relative-performance evaluation. We end by showing the students an estimated equation from a paper by R. Gibbons and K. Murphy (“Relative Performance Evaluation for Chief Executive Officers,” Industrial and Labor Relations Review 43, 1990): % Change in CEO pay = 6.8 + .18 Own stock return - .15 Market return. This equation shows the estimated change in CEO pay given the CEO’s stock return and the market return (all the parameter estimates are significant). It was estimated using a large sample of CEOs. We note that the own stock return enters positively and the market return enters negatively as predicted by theory. In the appendix, we indicate that the optimal relative weight on the market return (under certain
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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_Ch16_4e - Managerial Economics and Organizational...

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