Private Compensation and Organizational Design

66 Pages Posted: 28 Jun 2019 Last revised: 8 Apr 2021

See all articles by Andrea M Buffa

Andrea M Buffa

University of Colorado at Boulder - Leeds School of Business

Qing Liu

Boston University - Department of Finance & Economics

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Date Written: April 2021

Abstract

Most real world compensation contracts are private information, observed only by their direct signatories. This matters when agents work together to produce a joint output, because they care about each others’ incentives. Then, the principal can gain from designating one agent "team leader," with authority to decide all the bonuses. Such "outsourcing" of contracting, never optimal with fully public contracts, raises effort by improving observability, reassuring agents that the incentives provided are sufficiently strong; but distorts effort allocation, as the team leader is excessively compensated. Holding observability constant, delegation can raise output by skewing bonus pay towards more productive agents.

Keywords: privacy, private contracts, pay transparency, delegation, moral hazard, team, outsourcing, complementarities

JEL Classification: D86, D23

Suggested Citation

Buffa, Andrea M and Liu, Qing and White, Lucy, Private Compensation and Organizational Design (April 2021). Available at SSRN: https://ssrn.com/abstract=3410479 or http://dx.doi.org/10.2139/ssrn.3410479

Andrea M Buffa (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Qing Liu

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Lucy White

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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