Making Your Managers Work Through Penalties?

Incentive schemes for managers are the object of widespread research. After a short survey of standard tools to make managers work harder we present a simple formal model to check whether penalties for non-performance could be an alternative way to provide incentives. This possibility has been overlooked in the literature although stipulating fines in a labour contract of top managers would be permitted in many legal systems. We show that the use of penalties leads to the same expected revenue for the shareholders