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The Nexus between Contract Duration and the Use of Formal and Informal Incentive Pay
Author(s) -
Demougin Dominique,
Fabel Oliver
Publication year - 2019
Publication title -
labour
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.403
H-Index - 34
eISSN - 1467-9914
pISSN - 1121-7081
DOI - 10.1111/labr.12151
Subject(s) - remuneration , incentive , salary , credibility , duration (music) , constraint (computer aided design) , microeconomics , nexus (standard) , economics , business , finance , computer science , art , literature , embedded system , mechanical engineering , political science , law , market economy , engineering
We investigate a firm's choice of formal and informal effort incentives in a repeated game setting with undistorted signaling and liquidity‐constrained agents. The model allows for a simple geometric representation of credibility and incentive‐feasibility effects on optimal contract design. If credibility constitutes a binding constraint, explicit, i.e. enforceable, performance pay and discretionary salary promises are unambiguous substitutes and higher employee performance is associated with lower‐powered bonus pay. Using personnel data from an insurance company, we show that the model's predictions regarding the mediating role of expected contract duration on these relationships are consistent with remuneration practices.