Relative Performance Pay, Bonuses, and Job-Promotion Tournaments
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.
|Date of creation:||Sep 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thomas J. Dohmen & Ben Kriechel & Gerard A. Pfann, 2004.
"Monkey bars and ladders: The importance of lateral and vertical job mobility in internal labor market careers,"
Journal of Population Economics,
Springer, vol. 17(2), pages 193-228, 06.
- Dohmen, Thomas & Kriechel, Ben & Pfann, Gerard A., 2003. "Monkey Bars and Ladders: The Importance of Lateral and Vertical Job Mobility in Internal Labor Market Careers," IZA Discussion Papers 867, Institute for the Study of Labor (IZA).
- Dominique M. Demougin & Devon A. Garvie, 1991.
"Contractual Design with Correlated Information under Limited Liability,"
RAND Journal of Economics,
The RAND Corporation, vol. 22(4), pages 477-489, Winter.
- Dominique M. Demougin & Devon a. Garvie, 1991. "Contractual Design with Correlated Information Under Limited Liability," Working Papers 815, Queen's University, Department of Economics.
- Christian Grund, 2002.
"The Wage Policy of Firms - Comparative Evidence for the U.S. and Germany from Personnel Data,"
Bonn Econ Discussion Papers
bgse30_2002, University of Bonn, Germany.
- Grund, Christian, 2002. "The Wage Policy of Firms – Comparative Evidence for the U.S. and Germany from Personnel Data," IZA Discussion Papers 605, Institute for the Study of Labor (IZA).
- Lazear, Edward P & Rosen, Sherwin, 1981.
"Rank-Order Tournaments as Optimum Labor Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 89(5), pages 841-64, October.
- Bengt Holmstrom, 1999.
"Managerial Incentive Problems: A Dynamic Perspective,"
NBER Working Papers
6875, National Bureau of Economic Research, Inc.
- Holmstrom, Bengt, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 169-82, January.
- Schmitz, Patrick W., 2005.
"Workplace surveillance, privacy protection, and efficiency wages,"
Elsevier, vol. 12(6), pages 727-738, December.
- Patrick W. Schmitz, 2005. "Workplace surveillance, privacy protection, and efficiency wages," Bonn Econ Discussion Papers bgse25_2005, University of Bonn, Germany.
- Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
- Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Internal Economics of the Firm: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 881-919, November.
- Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
- Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
- Michael Gibbs & Wallace Hendricks, 2004.
"Do formal salary systems really matter?,"
Industrial and Labor Relations Review,
ILR Review, Cornell University, ILR School, vol. 58(1), pages 71-93, October.
- Demougin, Dominique & Fluet, Claude, 2001. "Monitoring versus incentives," European Economic Review, Elsevier, vol. 45(9), pages 1741-1764, October.
- Seltzer, Andrew & Merrett, David T, 2000. "Personnel Policies at the Union Bank of Australia: Evidence from the 1888-1900 Entry Cohorts," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 573-613, October.
- Malcomson, James M, 1986. "Rank-Order Contracts for a Principal with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 807-17, October.
- Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp3702. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.