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Seminario CEA-MIPP: «Incentives and Burnout: Dynamic Compensation Design With Effort Cost Spillover», Juan Dubra (University of Montevideo)


Los invitamos al ciclo de  SEMINARIOS ACADEMICO CEA- MIPP:

Cuándo: 23 de noviembre de 2022 – 12:00 PM Santiago.
Dónde: Sala Consejo (401), Beauchef 851, piso4 | Departamento de Ingeniería
Tema: Incentives and Burnout: Dynamic Compensation Design With Effort Cost
Presenta: Juan Dubra (University of Montevideo)

Employee burnout is a significant issue that has long plagued firms.
Salespeople are particularly susceptible to burnout due to the
high-pressure, boundary-spanning nature of their role as well as their
performance-driven compensation. The prevalence of burnout is an indication
that the costs of work-related effort (such as fatigue) not only drive a
salesperson’s utility and choices in the present, but carry over 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 both the firm and salesperson as myopic. Thus, we incorporate this
‘effort cost spillover’ effect in a dynamic, two-period principal-agent
model, with the salesperson’s effort cost in the second period increasing in
both her second-period effort and her first-period effort. We use this model
to explore the optimal design of the salesperson’s compensation plan over
time and to consider the connection between burnout and plan design. Our
model allows a forward-looking firm to account for the cumulative effect of
effort on a salesperson. As a result, we find that the firm prefers to offer
weaker incentives in the first period than a single-period model would
suggest, inducing less effort from the salesperson in order to decrease her
cost of effort (and likelihood of burning out) in the future. If both the
firm and the salesperson are forward-looking, the firm can achieve its best
possible outcome by committing to the salesperson’s contract for both
periods in advance. If the firm is unwilling or unable to commit to a
long-term plan, that best possible outcome is achievable if and only if the
spillover effects of effort are sufficiently small. When spillovers are
large, the firm’s equilibrium strategy can be to induce the salesperson to
burn herself out (working so hard in the first period that she cannot be
profitably employed in the second) and quit, even when she cannot be
replaced in the second period and the best possible outcome is achieved by
employing her in both periods.

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