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The Tenuous Relationship between Effort and Performance Pay

  • Kvaløy, Ola



  • Olsen, Trond


When a worker is offered performance related pay, the incentive effect is not only determined by the shape of the incentive contract, but also by the probability of contract enforcement. We show that weaker enforcement may reduce the worker's effort, but lead to higher-powered incentive contracts. This creates a seemingly negative relationship between effort and performance pay.

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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2012/11.

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Length: 28 pages
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:hhs:stavef:2012_011
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University of Stavanger, NO-4036 Stavanger, Norway

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