A Note on the Optimality of Bonus Pay

12 Pages Posted: 14 Mar 2000

See all articles by W. Bentley MacLeod

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Date Written: October 16, 1999

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 by 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.

JEL Classification: D82, J41

Suggested Citation

MacLeod, William Bentley, A Note on the Optimality of Bonus Pay (October 16, 1999). Available at SSRN: https://ssrn.com/abstract=214168 or http://dx.doi.org/10.2139/ssrn.214168

William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics ( email )

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