Incentive Pay and Managerial Expertise : Get More for Less?

In this paper the impact of ability and learning potential on incentive contracts is analyzed. The model's pay structure shows if agents must be motivated both to acquire knowledge and to use it appropriately the most successful agent need not be the one who receives the highest pay ex post. A riskier distribution of the agent's ability, that is a high learning potential of the agent, generates a less costly information system. If the principal's commitment is limited aggregate performance evaluation may be advantageous because it improves the temporal allocation of incentives