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Author: Robert Gibbons Publisher: ISBN: Category : Compensation management Languages : en Pages : 70
Book Description
This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.
Author: Robert Gibbons Publisher: ISBN: Category : Compensation management Languages : en Pages : 70
Book Description
This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.
Author: Arijit Mukherjee Publisher: ISBN: Category : Languages : en Pages : 42
Book Description
Firms often combine career concerns based incentives with incentives created through relational performance contracts. In this context, disclosure of worker's productivity information enhances career concerns based incentives, but may reduce the firm's ability to sustain relational contracts. The latter effect originates as upon reneging on the relational contract the firm can continue to rely on the career concerns based incentives. Thus, stronger is this incentive the larger is the punishment payoff of the firm. I consider an environment where a long-run firm faces a sequence of short-run workers, who can subsequently get raided (poached). The disclosure policy of the firm determines how much information about the worker's productivity it will share with the potential raiders. I provide a characterization of the optimal disclosure policy. When relational contracts substitutes career concern incentives, the optimal disclosure policy follows a cut-off rule where the more patient firms always opt for opaqueness. Also, the firm never combines the two forms of incentives when they are substitutes. Both of these results need not hold if the incentives are complements. I further show that in presence of firm specific matching gains, the set of discount factor that supports transparency is increasing in the size of the matching gain.
Author: Fenghua Song Publisher: ISBN: Category : Languages : en Pages : 42
Book Description
We provide a completely endogenous justification for an agent's preference for control or decision making autonomy and analyze optimal incentive contracts in a principal-agent setting with private benefits and principal-agent disagreement induced by heterogenous prior beliefs. Our analysis explains both why managers value autonomy and why it motivates them to perform well. The optimal contract gives the agent a fixed wage, a monetary incentive in the form of a share of the project payoff, possible autonomy over project choice, and possible autonomy over the choice of strategy that affects project success. The optimal contract reveals a sharp difference between private benefits and heterogeneous priors. Monetary incentives and agent autonomy are complementary incentive devices with private benefits, but are substitutes with heterogenous priors. Moreover, private benefits and heterogenous priors interact interestingly in the optimal contract, and there is also an interesting interaction between the agent's autonomy and career concerns. Greater autonomy makes perceptions of the agent's ability more sensitive to project success, so autonomy works through the agent's career concerns to generate positive incentive effects. We use the result of the analysis to provide economic content to the notion of quot;psychological ownership,quot; which is related to the agent's psychic gratification from a sense of control over outcomes, and is distinct from quot;objective ownership,quot; which is linked to the agent's monetary incentives.
Author: George Baker Publisher: ISBN: Category : Languages : en Pages : 31
Book Description
Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined used of subjective and objective performance measures in implicit and explicit incentive contracts. It shows that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. It also shows, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, subjective weights on objective measures are considered.
Author: Borys Grochulski Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.
Author: George Pierce Baker Publisher: ISBN: Category : Languages : en Pages : 31
Book Description
Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined used of subjective and objective performance measures in implicit and explicit incentive contracts. It shows that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. It also shows, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, subjective weights on objective measures are considered.
Author: Robert Gibbons
Author: Robert Gibbons
Author: Robert Gibbons
Author: 
Author: Arijit Mukherjee
Author: Li-An Zhou
Author: Fenghua Song
Author: George Baker
Author: Borys Grochulski
Author: Marzio Keiling
Author: George Pierce Baker