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1. Discuss incentive structures
a. Employees are motivated by many rewards including a) monetary compensation (both pay and bonuses) b) non-monetary benefits (such as healthcare) and c) abstract compensating differentials (such as enforcement of one's values, satisfaction from challenges, and a feeling of belonging). Monetary compensation is critical, but care should be taken to use other forms of compensation to reduce costs, improve outcomes, and better motivate employees. When an organization competes for employees solely through the use of monetary compensation, competitors have the ability to suck away some of the best talent and do so with lower costs.

• Knowledge workers This is especially true of industries reliant on knowledge workers for their operations. Knowledge workers have spent, and will continue to spend, a large portion of their time on skill acquisition in order to excel in their field. Consequently, these workers are able to demand comfortable living wages no matter where they are employeed. Economics suggests the "efficiency wage", a wage about market levels, in order to lure and retain the best. Given the high base salaries, this can quickly get expensive and likely does not even provide the best outcomes. A better strategy is to recognize the goals of knowledge workers and align incentives to work with these goals. For example, a anesthesiologist is a highly specialized individual who has gone through extensive education and must continue to learn in order to stay abreast of his field. Rather than try employ excessive monetary incentives, a hospital seeking the best anesthesiologists could establish a reputation for valuing and providing flexible for their specialists, engaging in cutting edge research, and/or providing stipends for specialists to attend conventions in their field.

• Traditional workers When seeking to attract and incentivize traditional workers, clever use of incentives can be used to breed loyalty and a culture of collectivism which boosts productivity. It is important not to loose sight of the goal for the incentive. For example, Nucor employed a variety of compensation schemes in order to improve the efficiency of its steel production teams. Company loyalty was generated by offering educational stipends for the children of factory workers. There was no limit on the number of children who could be covered or the time horizon over which incentives could be paid out. This was a well targeted incentive. First, by providing education for worker's children rather than workers, the company did not risk undermining their workforce and providing opportunities to leave the company. Second, maximum loyalty was achieved by targeting children's need, a soft spot for any individual, and paying out over a long period of time. Continuing sponsorship had the effect of frequently reminding the worker who pays the bills. Every report card becomes a reminder.

b. It is absolutely essential that incentives be considered while designing the structure of the organization. This enters into play in several ways.

First, the structure of the organization could artificially limit incentive options available. A small entrepreneurial organization will not find it very hard to tie their workers motives in line with the future of the company. It is relatively easy to distribute stock whose value the worker can influence via their initiative. In a larger corporation this is far less practical, as even high ranking executives might individually have only small effect on the outcomes of the organization. The larger organization could emulate the smaller somewhat by tying outcomes within smaller business divisions to compensation.

Second, a poorly structured organization could unwittingly demoralize its employees. If a division whose primary function revolves around a soon to be defunct, but currently cash-cow technology, it would be unwise to place an innovative task force within. The atmosphere will be hostile to the innovative outsiders, making it difficult for them to achieve recognition. This concept can be tied back to the anesthesiologists. A typical hospital will not have a large anesthesiologist staff but rather a few specialists, as with all of its specialties. These specialties must be divided such as to give them similar heft and recognition, least a neglected specialty leak labor to the outside.

c. Motivation schemes are always guaranteed to have unintended consequences. This stems from the truism that workers have limited time and effort to allocate; when one activity is incentivized, it is at the expense of some other activity. When providing incentives, it is important to minimize side effects by framing incentives to be flexible.

This is especially true of knowledge workers whose inner workings are not necessarily viewed or understood by the incentivizing manager. For example, consider a software development team, several programmers and a manager, charged with meeting a key deadline. Methods available to the manager include provision of extra wages for overtime work or provision of bonuses for each software feature (on a list given) implemented by the deadline or provision of a bonus based on a holistic view of the software's state at time of deadline. The overtime incentive will cause the workers to spend more time on the project, but possibly excessively or not at times where the extra work is useful. The feature specific bonuses will ensure that the number of features implemented will be maximized, although this might be done haphazardly or without effective integration. The final bonus is most flexible as it allows the highly knowledgeable workers to assess the best use of their time and efforts and apply them accordingly.

6. Discuss the prospects for migrating to a contractor based workforce

a. A contractor based workforce is one in which nearly all employees of firms become temporary/part-time rather than full-time employees. This could work as follows. Knowledge workers with specialist knowledge bind together into a collective organized by a small central organization ("PCORP") which functions as a network hub. Applying social networking tools, PCORP assists knowledge workers in creating a registry of people, talents, experiences, and goals where contributors are free to interact and collaborate. This network facilitates the formation of ventures spontaneously, as collaborators find and engage with each other. For outside firms, the network acts an interface with an available labor pool ready to take out ongoing for one-off tasks in return for compensation reflecting the value added by workers hired. The network is able to grew and benefit from increasing use. Good experiences, on the part of employers and employees, can be logged on the other parties data record and allow for the formation of reputation. Similarly, successful collaborators are able to endorse each other and return to collaborate again while working on other projects.

A typical transaction might go like this. BIGFIRM posts TASK to the network and receives a number of responses from interested parties. Using a combination of posted reviews, independent interviews, and pay negotiation, BIGFIRM selects CHEMIST to work through TASK and deliver a solution. While working on TASK, CHEMIST has an idea requiring help from PHYSICIST which whom she has worked before. PHYSICIST is contacted and signs an agreement to help with the project and not disclose information. Two months later, CHEMIST and PHYSICIST have solved the problem, with some help from their respective communities, are paid, and end their association with BIGFIRM. Three weeks later, CHEMIST is contacted again by BIGFIRM to solve another problem which they believe to be related to the original one. After solving this problem as well, CHEMIST is listed in an ongoing contract with BIGFIRM which gives them priority access to his talents in exchange for a small stipend which is paid out whether or not he is currently working on a project for BIGFIRM.

b. This model has several benefits • For workers - Workers will apply for and apply their skills to jobs which they see as a good fit. This allows for greater granularity in decision making than a full time job with many facets. - Knowledge workers crave ongoing learning and intellectual rigor in their work, else they become bored and unproductive. The ad hoc nature of this system would help keep work interesting. Also, it will allow workers to continually refocus on work which they find appealing. When some task sticks, the worker can gain experience and increasingly specialize in that function by performing it for many firms. - This provides an opportunity for lateral advancement in a way that a single firm could not. The better a worker becomes at some specific tasks, the greater demand / pay for that worker doing that task. The worker need not advance to another position (Ie, management) in order to advance their career. This cuts down on the Peter Principle and reinforces the knowledge workers concern for intellectual rigor.

• For organizations - The benefits for workers also help organizations. Self selection insures better qualified help and cuts down on shirking. The ability to provide intellectual rigor will act in a firm's favor when seeking the best job candidates, encouraging it to pursue uncharted, innovative territory. Negation of the Peter Principle. - Hiring workers just for when they are needed rather than "full time" is a step toward greater efficiency. Why pay for every moment of a worker's time when much of that time generates no outcomes? Similarly, for the worker, why spend unnecessary time with an employer when there are other, more interesting opportunities elsewhere? - Removing the burden of extensive HR capabilities frees the firm's resources for more productive uses such as focusing on the customers support needs and improving the product/].

c. This model has several costs. • For workers - This model introduces a lot of volatility in earnings which conflicts with worker risk aversion. There could be periods of time without much work on the table. At time this would be a useful way to refocus on other activities but in the medium term this is just a softening of the word "unemployment". It is possible that workers would either reject the volatility of this model or demand excessive wages to compensate.

• For organizations - There could be a large outflow of knowledge due to the temporary nature of the workforce. This would be especially problematic for organizations unable to offer consistently engaging work. Here the workers attracted could be those least able to innovate since they have limited opportunities elsewhere. This would also be problematic for organizations reliant on legacy or obscure systems since the knowledge necessary to perform could die out without demand from other organizations. - There is an issue of trust given the large number of contractors who would have access to sensitive proprietary knowledge before moving on to work elsewhere, including at competitors. Non disclosures and other agreements could limit come of this but it would be relatively easy to circumvent. - There is an issue of moral hazard given the disconnect between worker's long term goals and the goals of the organization. Some of this could be solved by reputation propagation but some would not. For example, if an IT specialist is hired to establish a firm's internal computer networking she might choose a radically new and relatively untested system in order to gain experience in using that system. Alternatively, she might opt to use an old and out dated system which she had a hand in creating.

d. Industries which already use a contractor based model are those in which a large number of diverse specialists are required. For example, hospitals will often contract with an organization representing specialists in order to bring several on board to provide services part time without the overhead of keeping them on the regular payroll. This includes anesthesiologists, physical therapists, and other specialities within general hospitals. Another example would be consulting specialties. A company in the midst of restructuring might bring on management consultants to help direct the process. Similarly, a company overhauling their internal communications networks might bring on an IT specialist to advise on the process. A company developing a web site could hire a web designer to establish its initial framework.

This is also occurring in industries where the requirements of workers are fairly standardized. Office temps and call centers are good examples here. An office worker fluent in standard tools such as word processing and skills such as memo writing could easily be brought on to supplement the general staff in times of need.

e. Industries in which knowledge is largely company specific or support is always needed are bad candidates for contract labor. For example, farmers need to have intimate knowledge of the land and climate they are working with in order to produce crops with great efficiency. Moving farmers all over the place on a contract basis would save little time (farming presents a full time workload) and would hinder the gathering of applicable knowledge of the farmers.

• To the extent that farmers benefit from seeing lots of agriculture techniques in use, moving them around could help to hone skills and generate new ideas.

2. Discuss technological innovation and adaptation

a. Improvements in communication and collaborative technology will change the drastically change the way in which business organizations are structured. Geographical barriers to collaboration are being dissolved. Diverse collaborators are able to find each other from seemingly impossible differences to work together around projects. Individuals are able to delve into new knowledge on a whim and even contribute to projects based around that knowledge. In short, technology is removing the search and transaction costs which Coase posited led to the formation of and organization within a firm. This does not imply that the firm will be rendered obsolete but rather that its role in the creation of economic outputs will evolve. Rather than meticulously directing the work/goals of employees, firms will assist in coordinating collaborative endeavors and subtly steer projects while leaving the details up to the participants. It is through this coordination or networking activity that firms can add the greatest value.

Nowhere is this more apparent than in the phenomenon of "crowdsourcing". Crowdsourcing is the process of breaking apart a goal in to operationalized parts, packaging those parts as tasks which provide bits of compensation (monetary and abstract), and pitching them to a broad base of contributors, turning them into informal employees. The result is a sale able product / revenue for the company. Examples include:

• "Threadless" - A venture in which a community comes together to create and vote on t-shirt designs which are then printed and sold by the company. The company provides the community with structure - a website portal, submission and voting tools, and printing capability - in which to function and be creative. In return, the company earns revenues from the shirts sold and marketing efforts targeted at the community they maintain.

• "iStockPhoto" - A venture in which a community comes together to produce an epic volume of stock photography. Again, the company provides structure - complete with website, forums, and a portal for displaying and selling photography. The company fuels the creative process of its photographers with the promise of small monetary rewards and a medium through which to gain respect in an established community - whether through tutoring other members or just getting recognition for fantastic photos. In return, the company earns revenues from the sale of stock photos to whoever will buy them (other members, marketing firms, websites, etc).

b. By facilitating superior communication and organizing, technology threatens entrenched companies by propagating a plethora of new competitors. Often times this means aggregating the work of individuals which were previously excluded from the market due to excessive barriers to entry.

Consider the market for stock photography. This was traditionally dominated by a few large firms possessing long term contracts with professional photographers. The volume of product was restricted by a lack of access to quality amateur work, pushing prices sky high (hundreds of dollars for some use or thousands of dollars for exclusive access to a piece) and providing protection and steady revenues for existing firms. All of a sudden, the internet provided an opportunity for acquisition and distribution of a much larger body of work. iStockPhoto capitalized on this by creating a community portal which satisfied the needs of a talented photo community and simultaneously generated a huge body of quality work in one place - just the recipe for high sales. Furthermore, because the "employees" were mostly casual shooters compensated by their participation in the community, costs were low and prices could be extremely competitive.

Threadless provides a unique example on the power of technology to drive new, innovative marketing. Because the design process at Threadless takes place in the community and is enforced by voting prior to production, each run of shirts is already a a market proven guaranteed success. To date, Threadless has yet to overproduce a single run of clothing. Everything sells, and quickly.

c. To succeed in an atmosphere of technological innovation, companies need to stop enacting barriers and start harnessing changes. This means staying abreast of innovations in the markets where they compete and acting to get a piece of the action so long as their head-start provides the financial muscle to do so. This could mean establishing new services utilizing emerging technology or the development of competing technology with even more features. Either way, a careful balance must be maintained between continuing to feed off the current cash-cow and jumping to the next big thing.

One, frequently adopted, method to work with technological change is the acquisition of emerging competitors. This can be a viable strategy to jump start change but the process must be treated with understanding and respect. A pharmaceutical company which absorbs a biotech company for their new product but then fails to retain the innovation of the original biotech company will merely find themselves faced with a new competitor, potentially founded by the same biotech entrepreneurs, soon after. A better approach would be to treat the acquisition as a hedge against further deterioration of the parent company production. The challenge here becomes designing the parent organization in such a way as to allow innovative branches room to grow.

The acquisition of iStockPhoto by by stock photography giant Getty Images highlights this strategy. Seeing the growing revenues earned by iStockPhoto, Getty Images felt its dominance threatened. It did not want to abandon its traditional stock photography offerings but very much wanted to hedge against its eventually deterioration. It opted to acquire iStockPhoto, while it still had the muscle to do so, but allow it to continue developing independently. So far this strategy has paid off, iStockPhoto continues to innovate and see growing revenues even as the rest of Getty is in decline. The next step will eventually be adopting the rest of Getty to the lessons of iStockPhoto.

d. As a knowledge worker, it is essentially to be well briefed in evolving technologies and advance one's skills in these technologies as it becomes clear that they are or will see wide adoption. One of the best ways to do this within one's field is participate in communities (online or otherwise) dedicated to technologies of interest. The established educational outlets such as University which provided the basis for the knowledge worker's knowledge are secondary to these communities because of a slow reaction to change. Community participation gives the dual benefits of immersion and networking amongst a group of individuals who in all likelihood display a fanatical devotion to their craft.

An example of this from my own experience revolves around next generation Photography workflow technology which emerged in only the past few years. As a serious amateur photographer, employee at a professional photography equipment provider, and consultant to freelance photographers who maintain their own computer equipment it is beneficial if not essential to be current in the latest tools available to improve the photographers workflow. In 2005 the release of new software by Apple (followed by Adobe) presented a whole new model for photo processing. At the time, the software was largely viewed as a passing fad or as a minor enhancement. Because of my involvement in online photography communities, I saw the technology as the game changer that it was - improving editing speed tenfold. I was able to leverage this knowledge into my own workflow and recommendations to others.