Compensation Schemes for Programmers in the Presence of Open Source Software

The presence of an open source software community has provided firms with a non-monetary compensation dimension: the firm can substitute wages for the flexibility it gives its programmers to participate in open source projects. The problem for the software firm is to determine the optimal extent of this participation by trading off the reduction in the programmer's effort on internal projects with the reduction in wages it needs to pay the programmer. That is, the firm needs to determine an optimal compensation package (a combination of wages and open source flexibility) to retain its programmers. We develop an analytical model that determines the optimal wage rate and the allowable extent of open source participation for a programmer during a contract period. We find that firms benefit more from the presence of open source in a tight labor market (e.g., when programmers have competing outside options). On the other hand, programmers get increased compensation due to presence of open source opportunities when they have few outside options. This benefit is more for less skilled programmers