QUESTION ONE

You are deciding how to compensate and evaluate two overseas plant managers.There are two alternative compensation plans.One plan (objective compensation plan) involves giving a manager a fixed wage and bonus based on the observable revenues of the plant.The second plan (subjective bonus plan) involves giving the manager a fixed wage and a bonus based on the assessment of the plant manager's effort made by a superior that periodically travels to the plant at some cost to the company to observe the manager's actions and the labor market conditions.

There are two overseas plants: (1) Guam and (2) Sri Lanka.The plant revenues depend on (1) the labor market conditions in the country, and (2) the plant manager's effort choice.The relationship between effort and labor market conditions for both plants are shown in following table.

Plant Revenues

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