Scandinavian Working Papers in Economics
Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics
No 07-12: Performance Pay, Sorting and Social Motivation
Tor Eriksson () and Marie-Claire Villeval
Additional contact information
Tor Eriksson: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Marie-Claire Villeval: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Abstract: Variable pay creates a link between pay and performance but may also help firms in attracting more productive employees. Our experiment investigates the impact of performance pay on both incentives and sorting and analyzes the influence of repeated interactions between firms and employees on these effects. We show that (i) the opportunity to switch from a fixed wage to variable pay scheme increases the average effort level and its variance; (ii) high skill employees concentrate under the variable pay scheme; (iii) however, in repeated interactions, efficiency wages reduce the attraction of performance pay. Social motivation and reputation influence both the provision of incentives and their sorting effect.
Keywords: Performance pay; incentives; sorting; social motivation; experiment
54 pages, April 4, 2008
Full text files
07-12_tor.pdf
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