Article

Bonus Culture: Competitive Pay, Screening and Multitasking

Roland Bénabou, and Jean Tirole

Abstract

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

Keywords

incentives; performance pay; bonuses; executive compensation; inequality; multitask;

Replaces

Roland Bénabou, and Jean Tirole, Bonus Culture: Competitive Pay, Screening and Multitasking, TSE Working Paper, n. 12-367, April 2012, revised March 2013.

See also

Published in

Journal of Political Economy, vol. 124, n. 2, April 2016, pp. 305–370