Imagine a group of stockbrokers working in an office together. They are emloyed by a large investment bank that advertises that they care about their customers and work hard to satisfy their needs. The brokers engage in retail relationships with individual customers who wish to use the brokers to buy and sell stock. The brokers were traditionally paid largely by salary with a modest bonus for the few very best performers as determined by the subjective judgement of the Supervising Broker on site.

1. Please identify ways that one stock broker might help or assist another in doing his or her job? Please listtwo or three that seem the most meaningful to the firm and explain.

2. Why might one stockbroker be willing to help another under the current salary payment scheme? What do they get out of it?

Now, imagine that the firm adopts a new performance pay scheme that pays each stockbroker ONLYbased on the volume of their own sales and trades(they are essentially paid commission for the activity of their own customers)

3. Describe the positive (productivity enhancing) consequences of a new performance pay scheme that rewards each stock broker only on the volume of their own individual sales and trades.

4. Explain how this scheme might ultimately hurt the firm. Detail the potential negative consequences for the brokers, the firm and customers.

5. How might you rearrange the pay scheme (use other incentives or remove those that exist to avoid the problem you have identified.