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Ambiguity in performance pay: A real effort experiment

Author

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  • Cooper, David J.
  • Johnson, David B.

Abstract

Many incentive plans are inherently ambiguous, lacking an explicit mapping between performance and compensation. We study the effect of ambiguous incentive plans on willingness to accept contracts to do a real-effort task, what types of individuals (low vs. high ability) accept the contract, the probability of completing the task, and performance on the task. The effect of ambiguous incentives is negative on multiple dimensions. Piece rate contracts significantly improve performance relative to fixed wages, primarily due to selection. This positive effect is not present with ambiguous incentives because high ability individuals are no more likely than low ability individuals to accept a contract with ambiguity. Modest levels of ambiguity about the relationship between performance and compensation are sufficient to reduce the probability that subjects choose and complete the task. Information about individual ability at the task reduces the probability that subjects choose and complete the task, but this is primarily due to decreased overconfidence rather than a reduction of uncertainty.

Suggested Citation

  • Cooper, David J. & Johnson, David B., 2026. "Ambiguity in performance pay: A real effort experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 248(C).
    • Handle: RePEc:eee:jeborg:v:248:y:2026:i:c:s0167268126002453
    DOI: 10.1016/j.jebo.2026.107659
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    Keywords

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    JEL classification:

    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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