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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2012/8:
The Tenuous Relationship between Effort and Performance Pay

Ola Kval°y () and Trond E. Olsen ()

Abstract: 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.

Keywords: Effort; performance pay; incentive contract; (follow links to similar papers)

JEL-Codes: J30; (follow links to similar papers)

28 pages, June 29, 2012

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