Senior executives at Skyhigh Construction, Inc., participate in a pick-your-salary plan. They choose salaries in a range between $125,000 and $150,000. By choosing a lower salary, an executive has an opportunity to make a larger bonus. If Skyhigh does not generate an operating profit during the year, then no bonuses are paid. Skyhigh has just hired two new senior executives, Allen Grossman and Felicia Arroyo. Each must decide whether to choose Option 1: a base pay of $125,000 with a possibility of a large bonus or Option 2: a base pay of $150,000 with a possibility of a bonus, but the bonus would be one-half of the bonus under Option 1.Grossman, 44 years old, is married with two young children. He bought his home at the height of the market and has a rather large monthly mortgage payment. Arroyo, 32 years old, just completed her MBA at a prestigious Ivy League university. She is single and has no student loans due to a timely inheritance upon entering graduate school. Arroyo just moved to the area, so she has decided to rent an apartment for at least one year. Given their personal profiles, inherent perceptions of risk, and subjective views of the economy, Grossman and Arroyo construct their individual probability distributions with respect to bonus outcomes shown in Table 5.8.

Data from in Table 5.8

In a report, use the sample information to evaluate payment plans for Grossman and Arroyo and help Grossman and Arroyo decide whether to choose Option 1 or Option 2 for his/her compensation package.

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TABLE 5.8 Grossman's and Arroyo's Probability Distributions Probability Bonus (in $) 0 50,000 100,000 150,000 Grossman 0.35 0.45 0.10 0.10 Arroyo 0.20 0.25 0.35 0.20