Dynamic Bonus Pools

42 Pages Posted: 31 Jul 2011 Last revised: 17 Nov 2023

See all articles by Jörg Budde

Jörg Budde

University of Bonn - Economic Science Area

Christian Hofmann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: October 24, 2023

Abstract

We study the properties of long-term bonus pools with rollover provision in a multi-period moral hazard setting, where the principal uses subjective information to privately assess the agent’s performance and the agent is protected by limited liability. To provide incentives, the principal funds a multi-period bonus pool with a fixed payment that may be distributed over time to the agent and a third party. We find that the optimal long-term bonus-pool contract features performance targets that are contingent on past performance. Specifically, high subjective performance implies an easy target, and low subjective performance implies a difficult target. To implement the long-term bonus-pool contract, the principal provides non-dichotomous performance reports. The study contributes to the literature that discusses the mechanisms that make subjective performance information useful for incentive contracting.

Keywords: Bonus Pool, Dynamic Agency, Subjective Performance Evalution, Verifiability

JEL Classification: D82, M40, M52

Suggested Citation

Budde, Jörg and Hofmann, Christian, Dynamic Bonus Pools (October 24, 2023). AAA 2012 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1899204 or http://dx.doi.org/10.2139/ssrn.1899204

Jörg Budde

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-(0)228-73-9284 (Phone)
+49-(0)228-73-1785 (Fax)

Christian Hofmann (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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