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Effort and selection effects of incentive contracts

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Author Info
Bouwens, J.F.M.G.
Lent, L.A.G.M. van (Tilburg University, Center for Economic Research)

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Abstract

We show that the improved effort of employees associated with incentive contracts depends on the properties of the performance measures used in the contract. We also find that the power of incentives in the contract is only indirectly related to any improved employee effort. High powered incentive increase the selection effect of the incentive contract and attract better employees to the firm. The selection effect of the incentive contract depends, in turn, on the (perceived) properties of the performance measures specified in the contract. These results hold after controlling for an array of incentive contract design characteristics and for differences in organizational context. Data is from a third party survey on compensation practices among Chief Executive Officers. Our estimation procedures address several known problems with using secondary datasets.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 130.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:2003130

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Find related papers by JEL classification:
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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