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The rise of individual performance pay

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  • 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)

Abstract

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.

Suggested Citation

  • Kvaløy, Ola & Olsen, Trond E., 2006. "The rise of individual performance pay," Discussion Papers 2006/22, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2006_022
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    File URL: http://hdl.handle.net/11250/163878
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    Citations

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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. 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.
    6. Daniel Ladley & Ian Wilkinson & Louise Young, 2013. "The Evolution Of Cooperation In Business: Individual Vs. Group Incentives," Discussion Papers in Economics 13/14, Department of Economics, University of Leicester.

    More about this item

    Keywords

    Relational contracts; multiagent moral hazard; indispensable human capital;

    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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