Managerial Skill Acquisition and Optimality of a Simple Bonus Rule

The benefit of non-information rationing aggregate performance evaluation is studied in a limited commitment setting. Depending on the prior distribution of the managerial skill parameter, an equal bonus rule, that is intertemporal aggregation of performance measures, can be efficient as it commits the principal to a more evenly spread allocation of incentives. The result lends support to the widespread use of linear bonus rules and piece rates for performance contingent compensation