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Compensation and performance: An experimental study

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  • Dodonova, Anna
  • Khoroshilov, Yuri

Abstract

This paper investigates how compensation structure affects performance in a simple but effort-consuming task. In this experimental study, the subjects were asked to multiply two-digit numbers for 40 min and were paid using either a linear (with different pay for performance sensitivities) or a convex (option-based) compensation mechanism. We found that per-unit wage has a non-linear positive effect on performance: whereas increasing per-unit compensation from $0 to $0.02 or from $0.05 to $0.15 has virtually no effect on performance, an increase from $0.02 to $0.05 results in higher productivity. We also found that option-based compensation results in better performance.

Suggested Citation

  • Dodonova, Anna & Khoroshilov, Yuri, 2014. "Compensation and performance: An experimental study," Economics Letters, Elsevier, vol. 124(2), pages 304-307.
  • Handle: RePEc:eee:ecolet:v:124:y:2014:i:2:p:304-307
    DOI: 10.1016/j.econlet.2014.06.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Compensation contract; Incentive contract; Experimental study;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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