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Its Not What You Pay

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  • Sue Fernie
  • David Metcalf

Abstract

Management scholars and economists have recently set out the principles underlying the "ideal" payment system to elicit good performance by aligning the interests of the principal and agent. Such a system involves an incentive contract, reputation and certain organizational arrangements. We analyze pay and performance in an occupation - jockeys - where the payment system for most individuals is congruent with the theoretical ideal. We are able to do this because, most unusually, a measure of pure individual performance exists for an unbalanced panel of some 50 individuals for eight years. Pay and performance go hand-in-hand and the sensitivity of changes in compensation to changes in performance is substantially larger than that found in many corresponding studies where the payment system is not ideal. By contrast, an alternative payment mechanism involving very large non-contingent payments for a few individuals does not generate good performance. Comparisons are also made with pay-performance relationships in other areas, including executive compensation. Our evidence suggests that "it's not what you pay it's the way that you pay it...and that's what gets results."

Suggested Citation

  • Sue Fernie & David Metcalf, 1996. "Its Not What You Pay," CEP Discussion Papers dp0295, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0295
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    Cited by:

    1. Felipe Balmaceda, 2002. "Compensation Methods in a Competitive Labor Market: the Role of Asymmetric Information," Documentos de Trabajo 139, Centro de Economía Aplicada, Universidad de Chile.
    2. Lazear, Edward, 2003. "Output-Based Pay: Incentives, Retention or Sorting?," IZA Discussion Papers 761, Institute of Labor Economics (IZA).
    3. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    4. Fornwagner, Helena, 2019. "Incentives to lose revisited: The NHL and its tournament incentives," Journal of Economic Psychology, Elsevier, vol. 75(PB).
    5. Rigdon, Mary, 2009. "Trust and reciprocity in incentive contracting," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 93-105, May.
    6. Canice Prendergast, 1996. "What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies," NBER Working Papers 5802, National Bureau of Economic Research, Inc.
    7. Felipe Balmaceda, "undated". "Compensation Methods in Competitive Labor Markets," ILADES-UAH Working Papers inv118, Universidad Alberto Hurtado/School of Economics and Business.
    8. Felipe Balmaceda, 2004. "Uncertainty, Pay for Performance and Adverse Selection in a Competitive Labor Market," Documentos de Trabajo 196, Centro de Economía Aplicada, Universidad de Chile.
    9. Edward P. Lazear, 1999. "Output-based Pay: Incentives or Sorting?," NBER Working Papers 7419, National Bureau of Economic Research, Inc.

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