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Outcome oriented approaches link the rewards of the

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Outcome-oriented approaches link the rewards of the organization and individual. However, agents are often riskaversive and may demand a compensating wage differential. Behavior- oriented contracts do not transfer risk and therefore do not require a compensating wage differential. Deciding what to use is based on the following: 1. Risk aversion among agents makes outcomeoriented contracts less likely. 2. Outcome Uncertainty—Profit is an example of an outcome. Agents are less willing to have their pay linked to profits to the extent that there is a risk of low profits. They would therefore prefer a behavior-oriented contract. 3. Job Programmability—As jobs become less programmable (less routine) outcomeoriented contracts are more likely.
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4. Measurable Job Outcomes—When outcomes are more measurable, outcomeoriented contracts are more likely. 5. Ability to Pay—Outcomeoriented contracts contribute to higher compensation costs because of the risk premium. 6. Tradition—A tradition of using (or not using) outcome-oriented contracts will make such contracts more (or less) likely
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