Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of $115,000.
When this same manager is given an annual, fixed salary of $115,000 and 5 percent of the firm’s profits—amounting to a total salary of $145,000 per year—the manager chooses to work 9 hours and shirks for 1 hours. Given this information, which of the compensation schemes does the manager prefer?
a. The scheme with fixed payment of $115,000 and a percentage of profits.
b. The manager is indifferent between the two payment schemes.
c. The scheme with only a fixed payment of $115,000.