Seminario CEDE - Juan Dubra

Employee burnout has long plagued firms and salespeople are 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 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 a contract for both periods in advance. Without commitment, the first-best remains achievable when effort spillovers are sufficiently small. Surprisingly, when the first-best is not achievable, the firm's equilibrium strategy may be to induce the salesperson to burn out in the first period (working so hard that she rejects any second-period contract that the firm would offer). 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.