FAMILY BUSINESS

Some considerations for structuring your “wife bonus”

You may have seen the news that a certain subset of financially successful men on Manhattan’s Upper East Side are now paying wife bonuses.

On the one hand, the idea that powerful men would be offering financial incentives to their stay-at-home spouses for successfully managing the household budget or getting the kids into private school sounds insanely sexist, a new low in a long history of attempts by men to confine women to a life of marital servitude.

But assuming this thing is even really a thing, there’s another important concern here, which is whether the bonuses will actually elicit the desired behavior and reward it appropriately. (After all, there are academic and societal futures of innocent children at stake.)

It may be that the husbands in these relationships are finding it harder to get the outcomes they want—their children’s admittance to a top private school, for example—and so they are throwing bonus money at the problem. This would be folly. It’s true that New York’s resurgence as a literal breeding ground for the well-to-do means there are more kids competing for an essentially finite number of seats at schools with suitable prestige. But any Master of the Universe paying attention in business school would know that tying incentive pay to factors beyond an employee’s—er, spouse’s—control isn’t an effective strategy.

Perhaps the husbands are simply trying to minimize the risks they no doubt learned about when they studied agency theory. In their seminal work on the topic, published in 1976, the economists Michael Jensen and William Meckling wrote:

We define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers, there is good reason to believe that the agent will not always act in the best interests of the principal. The principal can limit divergences from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the aberrant activities of the agent.

Four decades later, there’s still debate over how incentive pay for agents should be structured. The corporate world has bet big on the interest-aligning power of stock-based compensation, typically in the form of options. But recent research debunks the idea that such instruments are useful for anything beyond enriching the agents (i.e. CEOs), and in fact suggests that they make the recipients all the more inclined to put their own interests ahead of the company’s.

The good news for Manhattan’s married, male elite is that their agents—er, wives—presumably enter these relationships with an expected time horizon much longer than that of, say, your average private-equity investment. As mothers, as community volunteers, and as members of social networks arguably predicated in part on their continued attachment to their husbands, these women indeed have a vested interest in their families’ success—and that’s not something you can put on a formal vesting schedule.

Photo credit: Flickr user Nottingham Trent University. The image, which was cropped, was used under a creative commons license.

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