Altruism, social norms, and incentive contract design

We study theoretically and empirically the relation between altruism and incentive contract design. Theoretically, we extend Fischer and Huddart (2008) to investigate how social norms reinforce managers' altruistic preferences, thus affecting the optimal contract design related to incentive strength and performance measurement. Empirically, we draw on the notion of an organization's work climate to capture managers' altruistic preferences. Using data collected from a sample of 557 managers, we find that in a work climate where managers are mostly out for themselves, firms have lower pay-for-performance sensitivity and place a greater weight on aggregate performance measures. In addition, respondents report that they engage more in undesirable actions that are unproductive and costly to firm owners. In contrast, in a work climate where managers care about others (including peers in their organizational unit), firms place lower weights on aggregate performance measures. At the same time, respondents report that they supply more effort and engage less in undesirable actions.

Automated summary

This study examines the relationship between altruism and incentive contract design through theoretical and empirical analysis. Theoretical findings suggest that social norms strengthen managers' altruistic preferences, influencing the optimal contract design related to incentive strength and performance measurement. Empirical findings indicate that in a work climate where managers prioritize their own interests, firms have lower pay-for-performance sensitivity and place more importance on aggregate performance measures. On the other hand, in a work climate where managers care about others, firms assign lower weights to aggregate performance measures.