Discretion in Managerial Bonus Pools synthesizes and integrates a growing literature that has emerged over the past 10-15 years on the use of both objective and subjective performance indicators in managerial incentive plans. The authors examine the structure of efficient bonus pools (fixed payment schemes) in the presence of subjective performance indicators. The analysis covers a range of scenarios including single- and multi-agent settings, the interplay of objective and subjective indicators and short-term as opposed to long-term contracting relations. To synthesize the existing research, the authors frame their exposition around five recurring themes which collectively speak to the structure and the efficiency of incentive schemes based on subjective information: (i) Value of Subjective Performance Indicators (ii) Incremental Agency Cost (iii) Compression of Optimal Incentive Contracts (iv) Optimality of Proper Bonus Pools (v) Value of Multiperiod Contracting Discretion in Managerial Bonus Pools analyzes optimal incentive contracts for an individual agent. It focuses on contracting with multiple agents and introduces multi-period considerations. Throughout this mograph, the authors provide more specific references to individual results and proofs of formal propositions are provided in the Appendix of this mograph only when such proofs cant be found elsewhere or to emphasize a particular proof technique.
Madhav V. Rajan, Merle Ederhof, Stefan Reichelstein