Incentive Centered Design : Incentives Pay

Comparative Evaluation

Should performance be based on performance of

1. co workers
2. performance of workers elsewhere
3. performance of other companies

2. "Not fair" agent can't control what others do

but can act as a performance indicator.

Information Intensity Principle

If pay takes the form t(z,y) = alpha + beta(z+gy) then beta measure the intensity of the incentives: how much pay varies with effort

Optimal intensity depends on four factors:

1. incremental profits from addl effort
2. precision of estimating effort
3. agent's risk tolerance
4. agent's responsiveness to incentives.


Monitoring intensity principle

1. Spend more on improving monitoring when incentive intensity Beta is higher.

If principle can invest in better measurement/monitoring, then if incentive intensity of high then it is better to have more precise measures of performance.



Equal Compensation Effort

If agent's effort on multiple desirable activities cannot be separately monitored, then the marginal payoff to the agent for each must be equal or those with leser marginal payoffs will receive zero effort!

This is basically a possibility for leading to unattended consequences.


Eisenhardt Summary



Behavior Based Contracts Outcome Based Contracts

Info systems + -

Outcome Uncertainly + -

Agent Risk aversion + _

Principal Risk Aversion

Degree of Goal Conflict

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