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The Composition of Compensation Policy: From Cash to Fringe Benefits

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  • Patricia Crifo

    (CECO - Laboratoire d'économétrie de l'École polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

  • Marc-Arthur Diaye

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)

Abstract

In this paper, we develop a Principal-Agent model to analyze the optimal composition of the compensation policy with both monetary and nonmonetary incentives. We characterize nonmonetary benefits as symbols to capture a large set of non-wage compensations such as fringe benefits, status, identity (or self-image) or even sanctions. We show that when the agent's preference relation over monetary and nonmonetary benefits is common knowledge to both parties, nonmonetary incentives are always more efficient, that is Pareto-dominate, monetary incentives. We also characterize the optimal composition of the compensation policy when the principal imperfectly knows the agent's preferences. In particular, we show that a fixed fringe benefits coupled with a variable wage improves profits under this imperfect knowledge structure.

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  • Patricia Crifo & Marc-Arthur Diaye, 2005. "The Composition of Compensation Policy: From Cash to Fringe Benefits," Working Papers hal-00243030, HAL.
    • Handle: RePEc:hal:wpaper:hal-00243030
    Note: View the original document on HAL open archive server: https://hal.science/hal-00243030
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    References listed on IDEAS

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    Cited by:

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    2. Grolleau, Gilles & Mzoughi, Naoufel & Pekovic, Sanja, 2012. "Green not (only) for profit: An empirical examination of the effect of environmental-related standards on employees’ recruitment," Resource and Energy Economics, Elsevier, vol. 34(1), pages 74-92.
    3. Jiang, Xiandeng & Yang, Jin & Yang, Wei & Zhang, Jian, 2021. "Do employees’ voices matter? Unionization and corporate environmental responsibility," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1265-1281.

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