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The Composition of Compensation Policy : from Cash to Fringe Benefits

  • Patricia CRIFO
  • Marc-Arthur DIAYE

We develop a Principal-Agent model to analyze the optimal composition of the compensation policy with both monetary and nonmonetary incentives. We characterize nonmonetary benefits as symbols to capture a large set of non-wage compensations such as fringe benefits, status, identity (or self-image) or even sanctions. We determine the optimal composition of the compensation policy when the principal fully or imperfectly knows the agent’s preferences. We first show that wages and symbols are relative substitutes at the bottom and relative complements at the top of the wage structure. Secondly, we show that offering a mixed contract is always more profitable when the principal has a relative comparative advantage compared to the agent’s valuation of symbols. Finally, we analyze how the optimal mixed contract is modified when the principal faces further institutional constraints such as having to pay a fixed wage or symbol.

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Article provided by GENES in its journal Annals of Economics and Statistics.

Volume (Year): (2011)
Issue (Month): 101-102 ()
Pages: 307-326

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Handle: RePEc:adr:anecst:y:2011:i:101-102:p:15
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  1. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 9-32, Winter.
  2. Dana P. Goldman & Neeraj Sood & Arleen Leibowitz, 2003. "The Reallocation of Compensation in Response to Health Insurance Premium Increases," NBER Working Papers 9540, National Bureau of Economic Research, Inc.
  3. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.
  4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  5. Royalty, Anne Beeson, 2000. "Tax preferences for fringe benefits and workers' eligibility for employer health insurance," Journal of Public Economics, Elsevier, vol. 75(2), pages 209-227, February.
  6. Hashimoto, Masanori & Zhao, Jingang, 2000. "The labor market effects of non-wage compensations," Labour Economics, Elsevier, vol. 7(1), pages 55-78, January.
  7. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2012. "Social norms and economic incentives in firms," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 173-185.
  8. Raghuram Rajan & Julie Wulf, 2004. "Are Perks Purely Managerial Excess?," NBER Working Papers 10494, National Bureau of Economic Research, Inc.
  9. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  10. Fehr, Ernst & Gachter, Simon, 1998. "Reciprocity and economics: The economic implications of Homo Reciprocans1," European Economic Review, Elsevier, vol. 42(3-5), pages 845-859, May.
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