The impact of envy on relational employment contracts

Kragl, Jenny; Schmid, Julia

doi:10.1016/j.jebo.2009.07.016

Cited by 37 publications

(6 citation statements)

References 35 publications

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“…If the latter is the case, then it holds that

\bar{r_{G}} < \bar{r_{I}} (α)

for any α, and the above result indeed carries over to arbitrary variations in the agents' propensity for envy. Kragl and Schmid () provide a condition for which

\bar{r_{I}} (α)

in fact increases in α (see Proposition in that paper). Under that condition it must hold that

\bar{r_{I}} (α) - \bar{r_{G}}

is positive and increasing in α. Consequently, for a range of interest rates r with

\hat{r} (α) < r \leq \bar{r_{I}} (α)

and for any α, the principal clearly favors the individual bonus scheme over the group scheme.…”

Section: The Relational Contractsmentioning

confidence: 99%

“…As credibility issues do not arise in this case, I only consider the single‐period game. First, I will briefly characterize the principal‐agent problem with an individual bonus scheme, as analyzed by Kragl and Schmid (), and restate some of the main results as far as relevant for the subsequent analysis . Then, I will investigate the optimal contract with a group bonus scheme.…”

Section: The Contracts Under Verifiable Performancementioning

confidence: 99%

“…The firm's ability to sustain these contracts then depends decisively on her reputation with respect to honoring the agreements (see, e.g., Baker et al., ). Kragl and Schmid () show that envy among workers may soften the firm's reputation problem and thus enhance its ability to implement relational contracts. While the foregoing paper focuses on individual incentives, in the present paper, I introduce in a similar framework the possibility of group compensation and compare its advantage with the individual incentive regime.…”

Section: Introductionmentioning

confidence: 99%

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

Kragl

2015

Economics Manag Strategy

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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.

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“…If the latter is the case, then it holds that

\bar{r_{G}} < \bar{r_{I}} (α)

for any α, and the above result indeed carries over to arbitrary variations in the agents' propensity for envy. Kragl and Schmid () provide a condition for which

\bar{r_{I}} (α)

in fact increases in α (see Proposition in that paper). Under that condition it must hold that

\bar{r_{I}} (α) - \bar{r_{G}}

is positive and increasing in α. Consequently, for a range of interest rates r with

\hat{r} (α) < r \leq \bar{r_{I}} (α)

and for any α, the principal clearly favors the individual bonus scheme over the group scheme.…”

Section: The Relational Contractsmentioning

confidence: 99%

Section: The Contracts Under Verifiable Performancementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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

Kragl

2015

Economics Manag Strategy

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“…Second, as another outcome of the consideration of an equal pay norm, the relative advantages of TBC compared to RPE increase. Previous studies have similarly shown that social preferences on the part of the agents can lead to lowerpowered incentives (Neilson and Stowe 2010;Kragl and Schmid 2009;Englmaier and Wambach 2010;Bartling and von Siemens 2010a) and increase the merits of TBC as compared to RPE (Itoh 2004;Grund and Sliwka 2007;Sandner 2009). Although the underlying reasoning is comparable, our approach is different, as it is not based on agents comparing their remunerations.…”

Section: Introductionmentioning

confidence: 95%

Impact of an equal pay norm on the optimal design of incentive contracts

Krapp

Sandner²

2015

J Bus Econ

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Many firms do consider an equal pay norm when designing incentive contracts for their employees. This will affect the insights achieved in literature on incentive provision for multiple agents in a firm. We find that the consideration of an equal pay norm leads to less high-powered incentives and provides a rationale for the application of team-based compensation (TBC). When performance measures are positively correlated TBC can still be preferred over otherwise optimal relative performance evaluation schemes. What is more, the consideration of an equal pay norm makes mutual monitoring and coordination between agents more desirable than individual agent behavior. Finally, an increasing firm size decreases the desirability of individual agent behavior and correspondingly makes TBC even more attractive.

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“…Fehr and Schmidt [9] illustrated the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design. Kragl and Schmid [10] found that inequity aversion may be beneficial for that relational contracts may be more profitable to a certain extent. Eliashberg [11] analyzed competitive decision-making situations in terms of their preference structures and posterior performance, through a Bayesian decision-theoretic framework.…”

Section: Introductionmentioning

confidence: 99%

An employment contract with fairness preference

Song

Shi

Lin

2013

2013 25th Chinese Control and Decision Conference (CCDC)

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This paper explores the problem of principal's optimal decision on employment contract design, from the principal's perspective of maximizing the expected welfare in an uncertain environment with one principal and two agents, where both the two agents have properties of fairness preference. By describing the agents' effort as random variables, and devising the contract as a vector with two dimensions: fixed wage variable and share proportion variable, a new employment contract model with fairness preference is developed in the framework of incentive theory, particularly, the properties of the optimal efforts are discussed. The results show that the agents' optimal efforts are independent to the fixed wage, but increasing with respect to the share proportion, moreover, the agents would like to spend more effort to increase the output, if himself is fairness preferred, or the other agent is competitive preferred.

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The impact of envy on relational employment contracts

Cited by 37 publications

References 35 publications

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

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

Impact of an equal pay norm on the optimal design of incentive contracts

An employment contract with fairness preference

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