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Relative Performance Pay, Bonuses, and Job-Promotion Tournaments

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Author Info
Matthias Kräkel
Anja Schöttner () (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany)

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Abstract

Several 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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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 245.

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Date of creation: Sep 2008
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Handle: RePEc:trf:wpaper:245

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Related research
Keywords: bonuses; external recruitment; job promotion; limited liability; tournaments;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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