The Composition of Compensation Policy: from Cash to Fringe Benefits

Patricia Crifo and DIAYE Marc-Arthur

Annales d'Economie et de Statistique, 2011, issue 101-102, pages 307-326

Abstract: 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.

Date: 2011
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Related works:
Working Paper: The Composition of Compensation Policy: From Cash to Fringe Benefits (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:adr:anecst:y:2011:i:101-102:p:15

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