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Compensation contract design for vocational graduates with general and specific skills

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Abstract

This paper considers an optimization problem for an enterprise (she) who employs a graduate (he) getting qualification from vocational schools by designing a compensation contract. The vocational school graduate’s reservation wage depends on his professional skills and the degree to which the skills are general. Moreover, the vocational graduate has asymmetric information about the professional skills which are unknown to the enterprise. In order to maximize the enterprise’s expected profit and elicit the vocational graduate’s true skills, a compensation contract optimization model is established based on principal-agent theory. The analysis mainly demonstrates that the optimal pay-performance sensitivity is positively related with the graduate’s professional skills and the degree to which professional skills are general in the setting of asymmetric information. Furthermore, when general skills are relatively large, the optimal pay-performance sensitivity plays a more important role than the fixed wage in the total compensation structure. In contrast, the enterprise only pays a fixed wage to the vocational graduate and the pay-performance sensitivity is zero in a benchmark setting of symmetric information. Finally, the sensitive analysis shows the effects of the related parameters on the optimal pay-performance sensitivity, respectively.

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Acknowledgments

This work was supported by the Humanity and Social Science Foundation of Ministry of Education of China under Grant No. 12YJA880141.

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Authors and Affiliations

  1. School of Education, Tianjin University, Tianjin, 300072, China

    Xiaoli Liu & Yanli Xu

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  1. Xiaoli Liu
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  2. Yanli Xu
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Correspondence to Yanli Xu.

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Liu, X., Xu, Y. Compensation contract design for vocational graduates with general and specific skills. Int. J. Mach. Learn. & Cyber. 6, 811–818 (2015). https://doi.org/10.1007/s13042-015-0415-9

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  • DOI: https://doi.org/10.1007/s13042-015-0415-9

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