Bonus Formulae and Soviet Managerial Performance

Abstract

Only rarely have attempts been made to put into mathematical form the way managers in the Soviet-type economy are or might be rewarded for different facets of performance. Economists usually confine themselves to statements in words that output counts more in the payment of managers than cost reduction or that as part of economic reforms bonuses are to be more closely tied to profit. Yet it turns out that simple algebraic expressions can be used most advantageously in a study of the reward and performance of managers in the Soviet economy. Among other things, one can observe the prices which are implicit in different reward schemes. Economists have designed models of market socialism with actual prices and they have recognized that shadow prices may be implicit in the plan which emerges from a computer. But they do not appear to have recognized that prices are implicit in a system of rewards for fulfillment of a physical plan. At the same time that an algebraic formulation of bonus schemes reveals these prices it reveals that profit (net income) is a fundamental category not only in a market economy, capitalism or market socialism, but also in an economy of physical planning. Finally, the algebraic expression of managerial rewards shows how behavior in response to one part of a reward formula may conflict with behavior sought by another part of the formula.