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Group versus Individual Performance Pay in Relational Employment Contracts when Workers are Envious

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  • Jenny Kragl

Abstract

I compare group to individual performance pay when workers are envious and performance is nonverifiable. Avoiding payoff inequity, the group reward scheme is optimal as long as the firm faces no credibility problem. The individual reward scheme may, however, become superior albeit introducing the prospect of unequal pay. This is due to two reasons: Group incentives are relatively low‐powered compared to individual incentives, requiring higher incentive pay and impeding credibility of the firm. Moreover, with individual rewards, the firm benefits from the incentive‐strengthening effect of envy, allowing for yet smaller overall incentive pay and further softening the credibility constraint. I also show that contracts combining both individual and group rewards are often optimal, depending on the firm's credibility problem. These contracts include joint and relative performance pay schemes.

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  • Jenny Kragl, 2015. "Group versus Individual Performance Pay in Relational Employment Contracts when Workers are Envious," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(1), pages 131-150, March.
    • Handle: RePEc:bla:jemstr:v:24:y:2015:i:1:p:131-150
    DOI: 10.1111/jems.12088
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    References listed on IDEAS

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    1. Livio, Luca & De Chiara, Alessandro, 2019. "Friends or foes? Optimal incentives for reciprocal agents," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 245-278.
    2. Robert Dur & Jan Tichem, 2012. "Social Relations and Relational Incentives," CESifo Working Paper Series 3826, CESifo.
    3. Kragl, Jenny & Bental, Benjamin, 2020. "Other-Regarding Preferences and Incentives in the Societal Context," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224547, Verein für Socialpolitik / German Economic Association.
    4. Xiaoyang Long & Javad Nasiry, 2020. "Wage Transparency and Social Comparison in Sales Force Compensation," Management Science, INFORMS, vol. 66(11), pages 5290-5315, November.
    5. Bental, Benjamin & Kragl, Jenny, 2021. "Inequality and incentives with societal other-regarding preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 1298-1324.
    6. Romuald Elie & Dylan Possamai, 2016. "Contracting theory with competitive interacting agents," Papers 1605.08099, arXiv.org.
    7. Kragl, Jenny & Schmid, Julia, 2009. "The impact of envy on relational employment contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 766-779, November.
    8. Romuald Elie & Emma Hubert & Thibaut Mastrolia & Dylan Possamai, 2019. "Mean-field moral hazard for optimal energy demand response management," Papers 1902.10405, arXiv.org, revised Mar 2020.
    9. Romuald Élie & Emma Hubert & Thibaut Mastrolia & Dylan Possamaï, 2021. "Mean–field moral hazard for optimal energy demand response management," Mathematical Finance, Wiley Blackwell, vol. 31(1), pages 399-473, January.
    10. Contreras Oscar F. & Giorgio Zanarone, 2018. "Managing Social Comparison Costs in Organizations," Working Papers 2018-25, Banco de México.

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