The Composition of Compensation Policy: From Cash to Fringe Benefits
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.
|Date of creation:||2005|
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