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Relative Performance Pay, Bonuses, and Job-Promotion Tournaments

  • Matthias Kräkel

    ()

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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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse16_2008.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse16_2008.

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Length: 50
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:bon:bonedp:bgse16_2008
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  1. Michael Gibbs & Wallace Hendricks, 2004. "Do Formal Salary Systems Really Matter?," ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
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