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Fixed salary or incentive contract? The effect of stickiness of compensation contracts

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  • Toshiaki Wakabayashi

Abstract

This study adopts behavioural contract theory through a mathematical model and clarifies the situation in which a fixed–salary contract is preferable to an incentives–based one for the principal. Theoretically, the expected utility for the principal is higher under an incentives–based contract but, in reality, there are companies that employ people via fixed–salary contracts.This study fined that, in the multitasking case, a case exists in which the principal should offer a fixed–salary contract, and due to behavioural elements, compensation contracts will become inefficient; however, inefficiency may be reduced by using appropriate performance measures.

Suggested Citation

  • Toshiaki Wakabayashi, 2022. "Fixed salary or incentive contract? The effect of stickiness of compensation contracts," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 29(1), pages 179-190, January.
    • Handle: RePEc:taf:raaexx:v:29:y:2022:i:1:p:179-190
    DOI: 10.1080/16081625.2019.1673191
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