Suppose that a firm offers a divisional manager a linear pay-for-performance contract based on the revenues of the division the manager leads. The manager’s pay includes a fixed yearly salary F and a fraction of the division’s revenue α that is paid to the manager.

Suppose that the demand for this type of divisional manager increases, meaning that the firm has to increase this manager’s pay in order to retain her. Should the firm do this by increasing the salary F, the commission α, or both? Explain.