Incentives ‘and’ Status

Abstract

This paper characterizes the structure of monetary incentives in an organization with varying differences in employee status. Specifically, it analyzes how the optimal incentive scheme varies with changing status. With the help of a simple moral hazard framework with limited liability we show that for agents with lower outside option increased status leads to lower incentive pay whereas exactly the opposite happens for agents with higher outside option. For agents with very high status such that the limited liability doesn’t bind, an exogenous increase in status level leads to an unambiguous decrease in optimal incentive payment.