In this memo we need to calculate the expected wages for an employee given their effort level, and develop a pay structure that would induce them to put in high effort. Keep in mind that the employees will have outside options and incentives to shirk.

Dear Jeanne,

We need to better motivate our employees!

I have nine technicians putting in 8 hour shifts each day, but I don't think I am getting the most effort from them. They get paid $60,000 per year to produce our X535 line of material, but they each end up completing only about $120,000 worth of material each. While this is more than their pay, it just barely covers our overhead costs and raw materials costs. I don't have time to supervise each tech every hour, and when I do, they just get irritated and start complaining about work conditions. Apparently, when they do work hard, about 20% of the time the production equipment malfunctions, and slows them down to the $120k level. However, I do know that when they are slacking, production slows down about 80% of the time.

Based on my estimates, if they put in full effort, we could be bringing in over $300,000 revenue per tech. Compared to our competitors, we are offering the right salary for hard work, but for the quality of work they are putting in now, they would not be able to get a job that paid more than $30,000. I am thinking about offering a quota bonus system. What do you think? I need to do something or morale is going to go down. What incentives should I put in place?