note: Risk sharing is NOT the correct answer.

Wayne, Co. is an investment fund that manages billions of dollars of investments. R. Wayne, the founder, paid his employees some incentive compensation but also some amount of guaranteed base pay. His son, T. Wayne took over the fund last year and made a dramatic change in employee compensation. He started hiring employees with no flat pay but the promise that they would be paid 10% of all earnings but that they had to reimburse the firm for 10% of all losses. After the change, many employees left. Many of the new employees were habitual gamblers. This is an example of the effect of incentive compensation. Motivation Communication Screening Risk-sharing