Task Assignment and Variable Pay Ratio
35 Pages Posted: 10 Aug 2010 Last revised: 7 Dec 2010
Date Written: December 6, 2010
This paper employs a LEN-model with multiple tasks and multiple agents to investigate the decision of how to assign the responsibility for synergistic tasks in an environment where an aggregate performance measure is used for incentive design. Considering task assignment as an endogenous variable, we develop a simultaneous solution for the optimal task assignment and the managers’ compensation characterized by the variable pay ratio (i.e., variable pay in relation to total pay). Our analysis shows that a manager’s variable pay ratio depends on the number and type of tasks this manager has to perform, the compensation of other managers on the same hierarchical level, and how responsibility of tasks is assigned to them. For example, we find that a manager’s compensation structure is adjusted even if he is not directly affected by a task re-assignment decision. Hence, our results emphasize the interrelation of task assignment and incentive compensation and they suggest to control for firm-wide task assignments in empirical compensation studies.
Keywords: Task Assignment, Principal-Agent Analysis, Variable Pay Ratio
JEL Classification: M54, M41, D82, J41
Suggested Citation: Suggested Citation