Commitment and optimal incentive

Taoxiong Liu and Bihua Zhou

MPRA Paper from University Library of Munich, Germany

Abstract: We propose an extended principal-agent model considering employee commitment and describe how to motivate committed agent, who not only shows regard for his own income but also cares the organizational benefit. The principal also would like to provide support to such an agent and his utility depends on both the final profit and the payoff to the agent. There are some interesting insights into the characteristic of optimal contracts: First, commitment is an effective motivator and committed employee needs less monetary inducement to perform his job well than one who not. More specifically, undifferentiated pay is sufficient in incentivizing committed agent to implement high effort in some cases. Second, commitment and wage differential are substitutable to each other in the optimal incentive compensation design. Third, commitment is not always good for organizational efficiency when the increase in employee commitment relies on the principal’s support. Our model's finding is consistent with employee incentive in some organizations, and also help to incentive mechanism design under wages differential constraints and understanding excessive compensation.

Keywords: Commitment; Organizational support; Optimal Incentive; Contract (search for similar items in EconPapers)
JEL-codes: D23 J33 (search for similar items in EconPapers)
Date: 2011-12-08, Revised 2011-12-20
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-mic
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