Ergonomics and Incentive Compensation

Abstract Ergonomics is frequently invoked to foster productivity, competitiveness, regulatory compliance, consumer welfare, and the fulfillment of organizational objectives. As a first step to integrate ergonomics in the theory of the firm, we use a simple but non-standard principal-agent model. The principal (the firm) sets monetary compensation, while also investing in decreasing the agent’s (a representative employee’s) marginal cost of effort – thanks to process ergonomics – and increasing consumers’ willingness-to-pay for a more user-friendly product – thanks to product ergonomics. Our main finding/prediction is that investing in ergonomics comes with relatively lower incentive pay but entails higher output. Some policy implications and potential research avenues are briefly discussed.