This paper considers why organizations use promotions, rather than just monetary bonuses, to motivate employees even though this may conflict with efficient assignment of employees to jobs. When performance is unverifiable, use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses. When employees are risk neutral, use of promotion for incentives need not distort assignments. When they are risk averse, it may - sufficient conditions for this are given. The distortion may be either to promote more employees than is efficient (the Peter Principle effect) or fewer.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
026.
Find related papers by JEL classification: J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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