A Note on the Optimality of Bonus Pay

W. Bentley Macleod

Canadian International Labour Network Working Papers from McMaster University

Abstract: This note derives the optimal compensation contract with subjective evaluation when the principal and agent may not agree regarding performance. The optimal contract takes the form of a bonus payment whenever the principal believes performance is acceptable, but with the payment of a penalty by the principal whenever the agent disagrees with a negative evaluation of the principal. The efficiency of the relationship is increasing with the degree of correlation, a result that is consistent with the importance of trust for an efficient employment relationship.

Pages: 12 pages
New Economics Papers: this item is included in nep-lab, nep-mic and nep-spo
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:cilnwp:41

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