Scandinavian Working Papers in Economics

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

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

Ola Kvaløy () and Trond E. Olsen ()
Additional contact information
Ola Kvaløy: UiS Business School, University of Stavanger, Postal: University of Stavanger, 4036 Stavanger, Norway
Trond E. Olsen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: J30

28 pages, June 29, 2012

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