| Agency theory and models are the important components in the studies of incentive mechanism and contract designing. Along with the development of behavioral economics in the past decade, scholars had begun to incorporate social preferences into agency models, and therefore built a series of behavioral contract models. Among various social preferences, fairness or inequity aversion is the most referenced one in behavioral contract models. Generally, behavioral contract models incorporating fairness or inequity-averse preference kept the assumptions that agents are identical, and they use their absolute pay gap to measure their each inequity utility. However, such assumptions ignored agents’self-perception and self-positioning in social comparisons in the real world.In the firms, employees naturally form a social network, which is called employee social network. Employees as the actors who are embedded in the social network, usually possess discrepant social attributes or characteristics with others embedded in the network, that is the heterogeneity. The heterogeneity is embodied in the dissimilarity or diversity of job-related attributes (e.g., skills, experience, education and social capital) and non-job-related attributes (e.g., demography). In social comparisons, the heterogeneity will generate employees’perceptions by their own and those of others, and therefore leads to the sense of deserved pay regarding themselves and others, so as to match with their each social attributes. Hence, the heterogeneity will prompt employees to care more about the fairness caused by the comparison between the actual pay and deserved incentives, rather than merely the absolute gap of actual pay. In this paper, we define the preference that employees care about whether they get they deserved as deserved concerns.Based on the theory of social network, this paper focuses on the linear contract, and incorporates heterogeneous employees’deserved concerns into behavioral contract model, in order to study the impact of employees’heterogeneity and deserved concerns on their behaviors and the optimal incentive. In the model, we put forward that the employee will generate deserved perceptions, regarding herself and the opponent, of the two elements of linear contract, i.e., the fixed wage and the output sharing. Furthermore, based on the assumptions and propositions of our behavioral contract model, we build a conceptual model related to the relations among individual-level heterogeneity, heterogeneity in the employee network, deserve perceptions and employees’ effort. And we further testify such conceptual model by the empirical analysis, so as to enhance the robustness of our conclusions.This paper has following contributions. First, we illuminate the connotation as well as the antecedent and consequence of employees’ deserved concerns. Individual-level heterogeneity can generate employee’s deserved perceptions by her own and that of others. The differences between the two deserved perceptions lead to deserved pay gap. Employees would incorporate deserved pap gay into pay comparisons. Positive deserved pay gap can mitigate or decrease their inequity utility, while negative deserved pay gap can enlarge inequity utility, and in extreme cases, deserved pay gap may reverse fairness or inequity perceptions. We find that individual-level heterogeneity positively influences deserved pay gap, which has positively effect on employees’ effort.Second, we incorporate deserved concerns into behavioral contract models, so as to cover the shortage that using absolute pay gap to measure inequity utility in traditional behavioral contract models. We find that inequity aversion attitude has different effects on efforts according to different deserved perceptions. When employees perceive over-incentivized by their own, inequity aversion attitude can promote their effort. Conversely, inequity aversion attitude will lead employees to reduce effort when they perceive under-incentivized by their own. This conclusion is a supplement to traditional behavioral contract models. Furthermore, the optimal incentive level should be higher than employees’ deserved perceptions, and for more productivity, the optimal incentive has lower limiting value which depends on employees’ deserved perceptions and the output price. Wage compression will be mitigated considering employees’ deserved concerns. Compared with previous studies, we further clarify the scope of the optimal incentive.Third, we find that perceived incentive fairness over the network significantly affects employee efforts and competition between employees. On the one hand, perceived deserved pay gap positively influences employee efforts. If deserved pay gap is positive, the larger deserved pay gap means more undeserved pay that employee obtains, and thus leads to more effort. While if deserved pay gap is negative, the larger absolute value of deserved pay gap implies more inequity that employee perceives, and therefore generates less effort. On the other hand, perceived fairness overall the network positively impact on competition between employees. When employees perceive that the incentives are fair over the network, they focus on effort competition with others. However, when they perceive that incentives are unfair over the network, they may feel inherent inequity and decrease effort even if others enhance effort.Finally, we reveal that network heterogeneity can moderate the effects of deserved pay gap on employee effort, and the moderating effects dependent on the fairness perceptions over the network. If employees perceive the network is overall over-incentivized, network heterogeneity can positively moderate the relationship between deserved pay gap and effort, and also promote effort competitions between employees. However, if they perceive the network is overall under-incentivized, network heterogeneity will negatively moderate above relationship, and weaken employees’ tends to compete. It means employees prefer to compete with homogeneous ones in this case. Our empirical analysis suggest that the heterogeneity of gender, age, tenure and education has positive moderating effects when employees perceived the network is overall over-incentivized. And the heterogeneity of the three formers has negative moderating effects when employees perceived the network is overall under-incentivized, and the moderating effect of educational heterogeneity in this case is not significant.According to our conclusions, we provide some managerial advices aiming at incentive mechanism, guiding employees’fairness perceptions and taking advantages of heterogeneity of intra-firm networks. First, firms should appropriately maintain overall over-incentivized perceptions in employees, and creating identical intra-firm fairness climate. Second, firms should link compensation system with heterogeneity traits and guiding employees’fairness perceptions. Firms should clear what heterogeneity traits are key causes of deserved concerns based on their actual cases, such as industry, firm nature, and growth state. Then, firms need to properly link those heterogeneity traits with different components of compensation system. Furthermore, firms should keep transparency of structured compensation system, and guide employees self-position in order to keep an over-incentivized climate. Third, firms should appropriately maintain and utilize network heterogeneity so as to motivate employees to compete. The internal close social relations will decline competitions between employees and overall performance despite increasing cohesion. Firms using over-incentivized way to promote employees can dynamically increase intra-firm heterogeneity, e.g. adjusting educational structure or social background, to inspire employees to compete. However, considering many companies especially those in traditional industries tend to adopt weak incentives, they should avoid excessive heterogeneity of intra-firm networks because that their employees prefer to compete with homogeneous individuals.
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