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Reference Points, Performance and Ability: A Real Effort Experiment on Framed Incentive Schemes

Author

Listed:
  • K. Hilken
  • S. Rosenkranz
  • K.J.M. De Jaegher
  • M. Jegers

Abstract

The paper investigates the effect of four differently framed payment contracts on the agent's effort provision and performance in a real effort experiment. The four incentive payments are framed as a base wage and bonuses (one immediately pays bonuses, the other only after an initial performance-independent part), penalties or a combination of bonuses and penalties. The base wage that is offered, induces the reference point. The participants provide real effort and are paid for finding pairs in a customized Memory game. The bonus-only frame elicits the highest effort, whereas frames with penalties lag behind. Ability positively complements the effect of effort on performance. The combination of penalties and bonuses minimises the costs of the principal only for low levels of performance employing heterogeneous agents. For higher performance levels, framing a base wage with bonuses is cost-effective.

Suggested Citation

  • K. Hilken & S. Rosenkranz & K.J.M. De Jaegher & M. Jegers, 2013. "Reference Points, Performance and Ability: A Real Effort Experiment on Framed Incentive Schemes," Working Papers 13-15, Utrecht School of Economics.
    • Handle: RePEc:use:tkiwps:1315
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    References listed on IDEAS

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    Cited by:

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    2. Essl, Andrea & Jaussi, Stefanie, 2017. "Choking under time pressure: The influence of deadline-dependent bonus and malus incentive schemes on performance," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 127-137.

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    Keywords

    Real Effort Experiment; Optimal Payment Scheme; Principal-Agent Relationship; Ability; Bonus; Penalty;
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