Incentives and Burnout: Dynamic Compensation Design With Effort Cost Spillover

• Department of Economics

In this seminar, Juan Dubra (University of Montevideo), will present his paper "Incentives and Burnout: Dynamic Compensation Design With Effort Cost Spillover."

Employee burnout is an issue that has long plagued firms, with salespeople believed to be particularly susceptible. The prevalence of burnout indicates that work-related effort is not only costly in the present but has carryover effects into the future. The single-period principal-agent model commonly used to study sales force compensation design cannot fully account for this, as it effectively treats periods as independent. We incorporate 'effort cost spillovers' in a dynamic, two-period principal-agent model, with the salesperson's effort cost in the second period increasing in both her second-period and first-period efforts. We use this model to explore optimal sales force compensation design and to consider the connection between incentives and burnout. If the firm and salesperson are forward-looking, we find that the firm can achieve its first-best outcome by committing to the salesperson's contract for both periods in advance. Without commitment, the first-best remains achievable when the spillover effects of effort are suffciently small. Surprisingly, when the first-best outcome is not achievable, the firm's equilibrium strategy may be to induce the salesperson to burn herself out in the rst period (working so hard that she rejects any contract that the firm would offer in the second period). This holds even when the salesperson cannot be replaced in the second period and the first-best outcome requires her to work in both periods.

Co-authors: Rob Waiser and Jean-Pierre Benoit