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The Tenuous Relationship between Effort and Performance Pay

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  • Kvaløy, Ola

    ()
    (UiS)

  • Olsen, Trond

    (NHH)

Abstract

When a worker is offered performance related pay, the incentive effect is not only determined by the shape of the incentive contract, but also by the probability of contract enforcement. We show that weaker enforcement may reduce the worker's effort, but lead to higher-powered incentive contracts. This creates a seemingly negative relationship between effort and performance pay.

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File URL: http://dl.dropbox.com/u/8078351/uis_wps_econ_fin/uis_wps_2012_11_kvaloy_olsen.pdf
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Bibliographic Info

Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2012/11.

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Length: 28 pages
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:hhs:stavef:2012_011

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Postal: University of Stavanger, NO-4036 Stavanger, Norway
Web page: http://www.uis.no/research/economics_and_finance
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  17. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  18. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, vol. 97(3), pages 999-1012, June.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. On the negative correlation between effort and pay
    by Economic Logician in Economic Logic on 2012-06-29 15:49:00

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