Incentive Effects of Bonus Taxes in a Principal-Agent Model

University of Zurich Institute for Strategy and Business Economics Working Paper No. 140

29 Pages Posted: 12 Dec 2010 Last revised: 17 Aug 2012

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW)

Martin Grossmann

University of Zurich

Markus Lang

University of Zurich - Department of Business Administration (IBW)

Simon Wey

University of Zurich - Department of Business Administration (IBW)

Date Written: December 11, 2010

Abstract

Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases.

Keywords: Principal-agent model, bonus tax, executive compensation, incentive, pay regulation

JEL Classification: H24, J30, M52

Suggested Citation

Dietl, Helmut M. and Grossmann, Martin and Lang, Markus and Wey, Simon, Incentive Effects of Bonus Taxes in a Principal-Agent Model (December 11, 2010). University of Zurich Institute for Strategy and Business Economics Working Paper No. 140. Available at SSRN: https://ssrn.com/abstract=1723907 or http://dx.doi.org/10.2139/ssrn.1723907

Helmut M. Dietl

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Martin Grossmann

University of Zurich ( email )

Plattenstrasse 14
CH-8032 Zürich, 8032
Switzerland

Markus Lang (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

Simon Wey

University of Zurich - Department of Business Administration (IBW) ( email )

Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland

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