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The rise of individual performance pay

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  • Kvaløy, Ola

    ()
    (Norsk hotellhøgskole, Institutt for økonomi og ledelse, University of Stavanger)

  • Olsen, Trond E.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

Why does individual performance pay seem to prevail in human-capital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer-dependent incentives. In a setting with team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/22.

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Length: 28 pages
Date of creation: 11 Dec 2006
Date of revision:
Handle: RePEc:hhs:nhhfms:2006_022

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Keywords: Relational contracts; multiagent moral hazard; indispensable human capital;

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Citations

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Cited by:
  1. Daniel Ladley & Ian Wilkinson & Louise Young, 2013. "The Evolution Of Cooperation In Business: Individual Vs. Group Incentives," Discussion Papers in Economics 13/14, Department of Economics, University of Leicester.
  2. Kvaløy, Ola & Olsen, Trond E., 2008. "Relative performance evaluation, agent hold-up and firm organization," Journal of the Japanese and International Economies, Elsevier, vol. 22(2), pages 229-241, June.
  3. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.

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