SSHRC Spotlight: Identifying determinants of the performance bonus

Posted on Thursday, October 12th, 2017

Rene Kirkegaard

René Kirkegaard

This research from economics professor René Kirkegaard is funded by a SSHRC Insight Grant. Kirkegaard is also Canada Research Chair Tier II: Risk Management.

What does this research focus on?

This research program focuses on economic interactions in which one party is unable to observe the actions or the effort of the other party. For instance, it is often difficult for an employer to directly observe the effort level of his/her employees. Such an employer may have to offer performance pay in order to entice employees to work hard; however, existing theories do not always convincingly explain the exact nature of these real-world contracts.

What problem or challenge are you addressing with this research?

The overarching theme is to better understand and explain the characteristics of optimal performance pay contracts. A primary objective is to understand the problem when the employee makes many different decisions at once, such as when he/she is multitasking. The research program also aims to understand how employees determine the criteria for success that trigger bonus payments.

What is your research approach?

A central part of the research program is to construct simple and stylized mathematical models of a variety of economic relationships with hidden action. Such models make it possible to focus on the essence of the problem.

What impact do you hope this research will have?

The research program has broad relevance. It may help explain why businesses use certain types of contracts but not others. For instance, the research program aims to offer a better understanding of the use of industry benchmarks to determine compensation. Moreover, the research program may help improve government regulation of a range of industries. The reason is that regulators are typically less than perfectly informed about firms’ actions to e.g. limit pollution or to ensure food safety, the safety of their workforce, and the privacy of their customers, just to name a few issues. Thus, the regulator is in a similar situation to an employer who cannot observe the actions of her employees.

What’s next?

The second phase of this research aims to tackle complications arising from longer-term relationships and from competition between several employers who contracts with the same agent, such as a consultant. In the latter case, the contract that is offered by any one employer must optimally respond to the terms under which the consultant works for other employers.

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