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Performance Pay and Multi-dimensional Sorting: Productivity, Preferences and Gender

  • Dohmen, Thomas

    ()

    (University of Bonn)

  • Falk, Armin

    ()

    (University of Bonn)

This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. In a first step we elicit subjects' productivity levels. Subjects then face the choice between a fixed or a variable payment scheme. Depending on the treatment, the variable payment is either a piece rate, a tournament or a revenue-sharing scheme. We elicit additional individual characteristics such as subjects’ risk attitudes, measures of self-assessment and overconfidence, social preferences, gender and personality. We also elicit self-reported measures of work effort, stress and exhaustion. Our main findings are as follows. First, output is much higher in the variable pay schemes (piece rate, tournament, and revenue sharing) compared to the fixed payment scheme. Second, this difference is largely driven by productivity sorting. On average, the more productive a worker is, the more likely he self-selects into the variable pay scheme. Third, relative self-assessment and overconfidence affect worker self-selection, in particular into tournaments. Fourth, risk averse workers prefer fixed payments and are less likely to sort into variable pay schemes. Fifth, people endowed with social preferences are less likely to sort into tournaments. Sixth, variable pay schemes attract men more than women, a difference that is partly explained by gender-specific risk attitudes. Seventh, self-selection is also affected by personality differences. Finally, reported effort is significantly higher in all variable pay conditions than in the fixed wage condition. In sum, our findings underline the importance of multi-dimensional sorting, i.e., the tendency for different incentive schemes to systematically attract people with different abilities, preferences, self-assessments, gender and personalities.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2001.

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Length: 49 pages
Date of creation: Mar 2006
Date of revision:
Publication status: published in: American Economic Review, 2011, 101 (2), 556-590
Handle: RePEc:iza:izadps:dp2001
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