Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2009:9: Incentives in Business and Academia

Bertil Holmlund ()
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Bertil Holmlund: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper discusses some issues of compensation policy in business and academia from the perspectives of incentive theory, other theories, and empirical research. The main conclusion is that mechanical rules for performance-related pay are likely to be inferior to more subjective performance evaluation criteria. Formalized performance pay, where pay is directly linked to measures of output, can easily have dysfunctional effects, especially when some dimensions of performance are easier to observe than others. Subjective performance evaluation is not perfect, but it is probably the best method to obtain a holistic assessment of multidimensional performance indicators.

Keywords: compensation policy; performance-based pay; incentive theory.

JEL-codes: J30; J33

17 pages, June 9, 2009

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