Economists believe the free rider problem is very important in complex business organizational structures. Still, businesses continue to build teams to solve problems or to deliver products to consumers. Often special rewards or bonuses are provided to the team rather than to the individuals in the team. Write a brief essay that either defends the economists' concern or explains why economists are wrong on this issue.

Question

What will be an ideal response?

Answer 1

Although many economists find the free-rider arguments to be quite compelling, there are some offsetting considerations that potentially help explain the widespread popularity of group plans, despite the fact that free-riding is a problem. First, deferred compensation in the form of stock options or restricted stock makes it expensive for employees to leave and thus helps the firm retain employees. This will be especially effective when labor market conditions and stock prices are positively correlated. In this case, their plans index the employees' deferred compensation to their outside opportunities. Second, it might be beneficial to increase the awareness of employees about the stock price performance and profitability of the company. By focusing on these measures, employees learn how managerial and employee actions affect the bottom line. For instance, employees might be less likely to complain about a corporate restructuring when they see that it increases the firm's stock price. Indeed, it probably takes little stock ownership to motivate most employees to monitor the stock price on a frequent basis. Hence, these benefits can be obtained while shifting little risk to the employees. Third, employees might be less likely to take actions that harm other members of a group with whom they identify closely. Thus, when the group receives incentive pay, employees might not want to harm teammates by shirking on the job. In this case, attempting to avoid feelings like guilt or shame might motivate employees, even if they face limited direct financial consequences from shirking. Fourth, paying employees on stock-price performance and profits sends signals to employees about what is valued within the company. These signals serve to reinforce a performance-based corporate culture.