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A Note on the Optimality of Bonus Pay

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  • W Bentley Macleod

Abstract

This note derives the optimal compensation contract with subjective evaluation when the principal and agent may not agree regarding performance. The optimal contract takes the form of a bonus payment whenever the principal believes performance is acceptable, but with the payment of a penalty by the principal whenever the agent disagrees with a negative evaluation of the principal. The efficiency of the relationship is increasing with the degree of correlation, a result that is consistent with the importance of trust for an efficient employment relationship.

Suggested Citation

  • W Bentley Macleod, "undated". "A Note on the Optimality of Bonus Pay," Canadian International Labour Network Working Papers 41, McMaster University.
    • Handle: RePEc:mcm:cilnwp:41
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