Self Control and Incentives: An Analysis of Multi-Period Quota Plans
September 2012 | Parrish, Blake
It is well known that individuals often fail to exert proper self-control. In organizational settings, this can lead to reduced productivity and profits. We use the literature on present-biased preferences to model employees’ self-control problems and examine how firms can design compensation plans to reduce the negative consequences of their employees’ self-control problems. Our results suggest that firms can mitigate self-control problems by delaying payment to the employees. This can be achieved by using multiperiod quotas (such as annual quotas) to compensate employees for their cumulative performance. Although such plans are prevalent in the market, there is little theoretical research that shows when multiperiod quota plans can be optimal. The paper provides one potential explanation for the widespread use of such quota plans. Interestingly, we find that such plans may be optimal despite the fact that they encourage more procrastination. We also find that such plans lead to higher effort by the employees and can sometimes improve the welfare of not only the firm but also the employees.