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Why is variable sales pay a risk-sharing contract when rep effort is hard to observe?
| Variable | Question | Error if it is hidden |
|---|---|---|
| Effort observability | Can the relevant effort be verified by the principal? | Hidden effort is treated as measured effort. |
| Effort-output uncertainty | How predictable is the link from effort to output? | A noisy outcome is treated as a clean signal. |
| Agent risk | How costly is outcome risk to the person doing the work? | Risk transfer is treated as free. |
| Incentive loading | How strongly does pay vary with the outcome? | More variation is assumed to create more effort. |
| Wider control | What field management, information, or coaching exists? | Compensation is asked to do every management job. |
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Reference & Evidence
Source: Table from this essay. Sources and interpretation are given in the article.
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