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The Determinants of Salary and Bonus for Rank and File Employees

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  • Demougin, Dominique M.
  • Fabel, Oliver

Abstract

The current study integrates the repeated game approach to implicit contracts and the analysis of explicit bonus rules based on subjective performance evaluation to determine the optimal structure of the compensation scheme for the average white- collar employee. In contrast to previous contributions we assume that the agent is risk-neutral but liquidity constrained. The salary reflects the maximum reward associated with contractual compliance which can be implicitly agreed. If the probability that the employee remains within the firm increases, the principal can reduce the rent captured by the agent. Hence, the optimal salary increases and the bonus decreases. Nevertheless, the optimal effort supply unambiguously increases.

Suggested Citation

  • Demougin, Dominique M. & Fabel, Oliver, 2004. "The Determinants of Salary and Bonus for Rank and File Employees," Discussion Papers, Series I 327, University of Konstanz, Department of Economics.
    • Handle: RePEc:zbw:kondp1:327
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    References listed on IDEAS

    as
    1. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
    2. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    3. Bentley W. MacLeod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, American Economic Association, vol. 93(1), pages 216-240, March.
    4. Rayton, Bruce A., 2003. "The residual claim of rank and file employees," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 129-148, January.
    5. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    6. repec:eme:rlepps:v:18:y:1999:i:1999:p:177-242 is not listed on IDEAS
    7. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    8. Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
    9. Pearce, David G. & Stacchetti, Ennio, 1998. "The Interaction of Implicit and Explicit Contracts in Repeated Agency," Games and Economic Behavior, Elsevier, vol. 23(1), pages 75-96, April.
    10. William Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
    11. Clive Bull, 1987. "The Existence of Self-Enforcing Implicit Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 147-159.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Sloof, Randolph & Sonnemans, Joep, 2011. "The interaction between explicit and relational incentives: An experiment," Games and Economic Behavior, Elsevier, vol. 73(2), pages 573-594.
    2. Schöttner, Anja, 2005. "Relational contracts and job design," SFB 649 Discussion Papers 2005-052, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. repec:hum:wpaper:sfb649dp2005-052 is not listed on IDEAS

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    More about this item

    Keywords

    White-Collar Employees; Implicit Contract; Explicit Bonus; Reputational Equilibrium;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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