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Perks as Second Best Optimal Compensations

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Abstract

The finance literature views perks either as productivity enhancing expenditures or as a result of poor managerial control by shareholders. Using a corporate jet to attend a business meeting may be justified because of the returns generated for the firm; but flying on the same jet to reach a vacation resort reflects a misappropriation of the firm’s resources by the manager. Our paper challenges this view. We argue that complementarity between leisure and wages creates difficult incentive problems, because the bonuses or stock options that reward success increase the marginal disutility of effort. In such a context, we show that whenever there exist commodities (‘perks’) that are substitute to leisure (or even less complementary to leisure than money), the optimal incentive scheme involves overprovision of such commodities, in the sense that the agent should consume more of them that she would elect to, should she be given a choice between money and perks at the current market prices. This conclusion is valid even when perks must be provided independently of the manager’s performace. Finally, we discuss the role of governance by introducing manipulations a la Peng and Röell (2006), and show that, in contrast with standard intuition, perks are used even when governance is perfect, and poorer governance may result in less perks being offered to the agent.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 244.

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Date of creation: 18 Jan 2010
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Handle: RePEc:sef:csefwp:244

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Keywords: Perks; Moral Hazard; Incentives; Second Best;

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Cited by:
  1. Alex Edmans & Xavier Gabaix, 2009. "Tractability in Incentive Contracting," NBER Working Papers 15545, National Bureau of Economic Research, Inc.
  2. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc.

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