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The Composition of Compensation Policy: From Cash to Fringe Benefits


  • Patricia Crifo

    (CECO - Laboratoire d'économétrie de l'École polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique)

  • Marc-Arthur Diaye

    (Centre d'Etude de l'Emploi - Université d'Evry)


In this paper, 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 show that when the agent's preference relation over monetary and nonmonetary benefits is common knowledge to both parties, nonmonetary incentives are always more efficient, that is Pareto-dominate, monetary incentives. We also characterize the optimal composition of the compensation policy when the principal imperfectly knows the agent's preferences. In particular, we show that a fixed fringe benefits coupled with a variable wage improves profits under this imperfect knowledge structure.

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  • Patricia Crifo & Marc-Arthur Diaye, 2005. "The Composition of Compensation Policy: From Cash to Fringe Benefits," Working Papers hal-00243030, HAL.
  • Handle: RePEc:hal:wpaper:hal-00243030
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    References listed on IDEAS

    1. Rajan, Raghuram G. & Wulf, Julie, 2006. "Are perks purely managerial excess?," Journal of Financial Economics, Elsevier, vol. 79(1), pages 1-33, January.
    2. Goldman, Dana P. & Sood, Neeraj & Leibowitz, Arleen, 2005. "The reallocation of compensation in response to health insurance premium increases," Economics Letters, Elsevier, vol. 88(2), pages 147-151, August.
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    5. 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.
    6. Kreps, David M, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-364, May.
    7. 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 1325-1348, December.
    8. 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..
    9. Hashimoto, Masanori & Zhao, Jingang, 2000. "The labor market effects of non-wage compensations," Labour Economics, Elsevier, vol. 7(1), pages 55-78, January.
    10. 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.
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