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The rise of individual performance pay

  • Kvaløy, Ola

    ()

    (Norsk hotellhøgskole, Institutt for økonomi og ledelse, University of Stavanger)

  • Olsen, Trond E.

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Why does individual performance pay seem to prevail in human-capital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent 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 team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

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File URL: http://hdl.handle.net/11250/163878
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/22.

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Length: 28 pages
Date of creation: 11 Dec 2006
Handle: RePEc:hhs:nhhfms:2006_022
Contact details of provider: Postal:
NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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