Relative Performance Pay, Bonuses, and Job-Promotion Tournaments
AbstractSeveral empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3702.
Length: 52 pages
Date of creation: Sep 2008
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Other versions of this item:
- Matthias Kräkel, 2008. "Relative Performance Pay, Bonuses, and Job-Promotion Tournaments," Bonn Econ Discussion Papers bgse16_2008, University of Bonn, Germany.
- Kräkel, Matthias & Schöttner, Anja, 2008. "Relative Performance Pay, Bonuses, and Job-Promotion Tournaments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 245, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-BEC-2008-09-29 (Business Economics)
- NEP-CTA-2008-09-29 (Contract Theory & Applications)
- NEP-LAB-2008-09-29 (Labour Economics)
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