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Performance-pay, sorting and social motivation

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  • Eriksson, Tor
  • Villeval, Marie Claire

Abstract

Variable pay links pay and performance but may also help firms to attract more productive employees. Our experiment investigates the impact of performance-pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance, and (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance-pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 68 (2008)
Issue (Month): 2 (November)
Pages: 412-421

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Handle: RePEc:eee:jeborg:v:68:y:2008:i:2:p:412-421

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Performance-pay Incentives Sorting Social motivation Experiment;

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References

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  1. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," Munich Reprints in Economics 20659, University of Munich, Department of Economics.
  2. Andrew E. Clark & David Masclet & Marie Claire Villeval, 2010. "Effort and Comparison Income: Experimental and Survey Evidence," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(3), pages 407-426, April.
  3. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
  4. Dohmen Thomas & Falk Armin, 2010. "Performance Pay and Multi-dimensional Sorting - Productivity, Preferences and Gender," Research Memorandum 012, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Tor Eriksson & Sabrina Teyssier & Marie-Claire Villeval, 2006. "Self-Selection and the Efficiency of Tournaments," Post-Print halshs-00175041, HAL.
  6. Gneezy, U. & Rustichini, A., 1998. "Pay Enough - Or Don't Pay at All," Discussion Paper 1998-57, Tilburg University, Center for Economic Research.
  7. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1996. "Involuntary unemployment and non-compensating wage differentials in an experimental labour market," ULB Institutional Repository 2013/5917, ULB -- Universite Libre de Bruxelles.
  8. Malcomson, James M., 1999. "Individual employment contracts," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 35, pages 2291-2372 Elsevier.
  9. Daniel Parent, 1997. "Methods of Pay and Earnings: A Longitudinal Analysis," CIRANO Working Papers 97s-14, CIRANO.
  10. David Dickinson & Marie-Claire Villeval, 2004. "Does Monitoring Decrease Work Effort? The Complementarity Between Agency and Crowding-Out Theories," Post-Print halshs-00175010, HAL.
  11. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  12. repec:eme:rlepps:v:18:y:1999:i:1999:p:177-242 is not listed on IDEAS
  13. Harry J. Paarsch & Bruce S. Shearer, 1999. "The Response of Worker Effort to Piece Rates: Evidence from the British Columbia Tree-Planting Industry," Journal of Human Resources, University of Wisconsin Press, vol. 34(4), pages 643-667.
  14. Marianne Bertrand, 2004. "From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 723-766, October.
  15. Bellemare, Charles & Shearer, Bruce S., 2006. "Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment," IZA Discussion Papers 2227, Institute for the Study of Labor (IZA).
  16. Simon Gächter & Ernst Fehr, . "Fairness in the Labour Market – A Survey of Experimental Results," IEW - Working Papers 114, Institute for Empirical Research in Economics - University of Zurich.
  17. Daniel S. Nagin & James B. Rebitzer & Seth Sanders & Lowell J. Taylor, 2002. "Monitoring, Motivation, and Management: The Determinants of Opportunistic Behavior in a Field Experiment," American Economic Review, American Economic Association, vol. 92(4), pages 850-873, September.
  18. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  19. Jason Barro & Nancy Beaulieu, 2003. "Selection and Improvement: Physician Responses to Financial Incentives," NBER Working Papers 10017, National Bureau of Economic Research, Inc.
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  21. Falk, Armin & Gachter, Simon & Kovacs, Judit, 1999. "Intrinsic motivation and extrinsic incentives in a repeated game with incomplete contracts," Journal of Economic Psychology, Elsevier, vol. 20(3), pages 251-284, June.
  22. W. Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
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Citations

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Cited by:
  1. Agnes Baeker & Vanessa Mertins, 2012. "Risk-sorting and preference for team piece rates," IAAEU Discussion Papers 201208, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  2. Cunyat, Antoni & Sloof, Randolph, 2011. "Employee types and endogenous organizational design: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 553-573.
  3. Jonathan de Quidt, 2014. "Your Loss Is My Gain: A Recruitment Experiment With Framed Incentives," STICERD - Economic Organisation and Public Policy Discussion Papers Series 52, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. repec:dgr:uvatin:2010074 is not listed on IDEAS
  5. Ann Bartel & Brianna Cardiff-Hicks & Kathryn Shaw, 2013. "Compensation Matters: Incentives for Multitasking in a Law Firm," NBER Working Papers 19412, National Bureau of Economic Research, Inc.
  6. Michalis Drouvelis & Julian C. Jamison, 2012. "Selecting public goods institutions: who likes to punish and reward?," Working Papers 12-5, Federal Reserve Bank of Boston.

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