Group versus Individual Performance Pay in Relational Employment Contracts when Workers are Envious

Abstract

I compare group to individual performance pay when workers are envious and performance is nonverifiable. Avoiding payoff inequity, the group reward scheme is optimal as long as the firm faces no credibility problem. The individual reward scheme may, however, become superior albeit introducing the prospect of unequal pay. This is due to two reasons: Group incentives are relatively low‐powered compared to individual incentives, requiring higher incentive pay and impeding credibility of the firm. Moreover, with individual rewards, the firm benefits from the incentive‐strengthening effect of envy, allowing for yet smaller overall incentive pay and further softening the credibility constraint. I also show that contracts combining both individual and group rewards are often optimal, depending on the firm's credibility problem. These contracts include joint and relative performance pay schemes.

Contracting Theory with Competitive Interacting Agents

“…Later studies involving a Principal and several Agents include Itoh [46], Rey-Biel [71], Bartling and von Siemens [2,3], or Grund and Sliwka [39], which analyze the consequences of inequity aversion for team incentives. Demougin and Fluet [17,18,19] as well as Neilson and Stowe [65,66] or more recently Kragl [53], show that a trade-off between incentive effect and inequity costs also arises with individual performance pay. Another related paper is Dur and Glazer [24], where the authors study optimal contracts when workers envy their boss.…”

Mean–field moral hazard for optimal energy demand response management

“…1 There was a much larger number of attempts in static or discrete-time settings, but always with finitely many agents. We refer the reader to the most notable works in this direction, among which we can find Bartling andvon Siemens (2010), Demougin, Fluet, andHelm (2006), Demski & Sappington (1984), Green and Stokey (1983), Grund and Sliwka (2005), Harris, Kriebel, and Raviv (1982), Holmström (1982), Itoh (2004), Mookherjee (1984), Nalebuff and Stiglitz (1983), Rey-Biel (2008), as well as Neilson and Stowe (2010) or Kragl (2015 4 See, for example, the phone application EDF & Moi by the french electricity producer and provider Electricité de France, or the website of Synergy, an Australian producer and provider. 5 See, for example, the proposal of the Environmental Defense Fund in https://www.edf.org/sites/default/files/ time-variant_pricing_fact_sheet_-_april_2015.pdf 6 Note that since is a deviation from a baseline consumption, the upper bound for the drift control is coherent, since the agent cannot consume a negative amount of electricity.…”

“…11There was a much larger number of attempts in static or discrete‐time settings, but always with finitely many agents. We refer the reader to the most notable works in this direction, among which we can find Bartling and von Siemens (2010), Demougin, Fluet, and Helm (2006), Demski & Sappington (1984), Green and Stokey (1983), Grund and Sliwka (2005), Harris, Kriebel, and Raviv (1982), Holmström (1982), Itoh (2004), Mookherjee (1984), Nalebuff and Stiglitz (1983), Rey‐Biel (2008), as well as Neilson and Stowe (2010) or Kragl (2015). …”

Gestión de los costos de comparación social en las organizaciones

“…Nuestro trabajo también se relaciona con la literatura que analiza los contratos de incentivos en presencia de problemas de equidad, tanto cuando el rendimiento de los empleados es verificable (e.g., Englmaier y Wambach, 2010; Englmaier y Leider, 2012) como cuando no lo 7 es (e.g., Kragl y Schmid, 2009;Bartling y von Siemens, 2010;Kragl, 2015). Entre otras cosas, esta literatura argumenta que las preocupaciones sobre imparcialidad pueden tener un efecto ambiguo sobre la compensación, ya que pueden inducir a los empleados de bajo rendimiento a intentar restablecer la equidad aumentando su esfuerzo.…”