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Evaluating a Performance-Based Contract Strategy
A consulting firm has historically offered a single, generous starting salary to all new analysts. However, they've noticed that the average performance of their new hires has been declining. To address this, the firm's management proposes a new compensation structure with two options for all incoming analysts:
- Contract A: A high base salary with a small, fixed annual bonus.
- Contract B: A significantly lower base salary but with a large potential bonus tied directly to individual performance metrics.
Critique the firm's proposed two-contract strategy. In your evaluation, first diagnose the likely underlying problem with their original single-salary approach. Then, assess whether the new strategy is likely to be effective in improving the average quality of the analysts they hire, explaining the reasoning behind your judgment.
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Evaluating a Performance-Based Contract Strategy
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