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Paid to Perform? Compensation Profiles under Pure Wage and Performance Related Pay Arrangements

Author

Listed:
  • Sessions, John G.

    () (University of Bath)

  • Skåtun, John D.

    () (University of Aberdeen)

Abstract

Whilst existing efficiency wage literature assumes detection probabilities of shirkers are exogenous, this paper finds them positively and endogenously dependent on non-shirkers' effort. It shares the result with the endogenous monitoring models where, in some regions, workers reduce effort in response to higher wages, but differs in that firms never operate in those regions. The paper further provides theoretical reasons for the empirical regularity that increased usage of performance related pay (PRP) flattens the pay-tenure profile. Wages and effort increase over the lifecycle, both with and without PRP, but with late payments in PRP falling short of pure wage arrangements.

Suggested Citation

  • Sessions, John G. & Skåtun, John D., 2011. "Paid to Perform? Compensation Profiles under Pure Wage and Performance Related Pay Arrangements," IZA Discussion Papers 5619, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5619
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    Keywords

    monitoring; tenure; efficiency wages;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms

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