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Aligning Ambition and Incentives

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  • Alexander K. Koch
  • Eloïc Peyrache

    ()
    (School of Economics and Management, University of Aarhus, Denmark)

Abstract

Labor turnover creates longer term career concerns incentives that motivate employees in addition to the short term monetary incentives provided by the current employer. We analyze how these incentives interact and derive implications for the design of incentive contracts and organizational choice. The main insights stem from a trade-off between ‘good monetary incentives’ and ‘good reputational incentives’. We show that the principal optimally designs contracts to create ambiguity about agents’ abilities. This may make it optimal to contract on relative performance measures, even though the extant rationales for such schemes are absent. Linking the structure of contracts to organizational design, we show that it can be optimal for the principal to adopt an opaque organization where performance is not verifiable, despite the constraints that this imposes on contracts.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-16.

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Length: 36
Date of creation: 05 Nov 2008
Date of revision:
Handle: RePEc:aah:aarhec:2008-16

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Reputation; Asymmetric learning; Relative performance contracts; Transparency;

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Cited by:
  1. Julia Nafziger & Heiner Schumacher, 2013. "Information Management and Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 140-163, 03.
  2. Imhof, Lorens & Kräkel, Matthias, 2014. "Bonus pools and the informativeness principle," European Economic Review, Elsevier, vol. 66(C), pages 180-191.
  3. Alexander K. Koch & Eloic Peyrache, 2005. "Aligning Ambition and Incentives," Royal Holloway, University of London: Discussion Papers in Economics 05/03, Department of Economics, Royal Holloway University of London, revised Mar 2005.
  4. Stephen Eliot Hansen, 2010. "The Benefits of Limited Feedback in Organizations," Working Papers 490, Barcelona Graduate School of Economics.

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