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The Rise of Individual Performance Pay

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  • Ola Kvaløy
  • Trond E. Olsen

Abstract

Existing empirical evidence suggests that individual performance pay is more prevalent in human‐capital‐intensive industries. We introduce a model that can contribute to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer‐dependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold up, the lower is the implementable degree of peer‐dependent incentives. In a setting with complementary tasks, we show that although team‐based incentives are optimal if agents are dispensable, it may be costly, and, in fact, suboptimal, to provide team incentives when the agents become indispensable.

Suggested Citation

  • Ola Kvaløy & Trond E. Olsen, 2012. "The Rise of Individual Performance Pay," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 493-518, June.
  • Handle: RePEc:bla:jemstr:v:21:y:2012:i:2:p:493-518
    DOI: j.1530-9134.2012.00332.x
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    Cited by:

    1. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.
    2. Lamantia, Fabio & Pezzino, Mario, 2016. "Evolutionary efficacy of a Pay for Performance scheme with motivated agents," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 107-119.
    3. Brad R. Humphreys & Jie Yang, 2014. "Peer Enforcement in Teams: Evidence from High-Skill Professional Workers with Repeated Interactions," Working Papers 14-24, Department of Economics, West Virginia University.
    4. Ola Kvaløy & Trond E. Olsen, 2008. "Relative Performance Evaluation, Agent Hold-up and Firm Organization," NBER Chapters, in: Organizational Innovation and Firm Performance, pages 229-241, National Bureau of Economic Research, Inc.
    5. Chris Benner & Ferran Mane, 2011. "From Internal to Network Labor Markets? Insights on New Promotion Processes from the Call Center Industry," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 50(2), pages 323-353, April.
    6. Ladley, Daniel & Wilkinson, Ian & Young, Louise, 2015. "The impact of individual versus group rewards on work group performance and cooperation: A computational social science approach," Journal of Business Research, Elsevier, vol. 68(11), pages 2412-2425.
    7. Daniel Ladley & Ian Wilkinson & Louise Young, 2013. "The Evolution Of Cooperation In Business: Individual Vs. Group Incentives," Discussion Papers in Economics 13/14, Division of Economics, School of Business, University of Leicester.

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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