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Performance Pay, Sorting and Social Motivation

Author

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  • Eriksson, Tor

    (Department of Economics, Aarhus School of Business)

  • Villeval, Marie-Claire

    (Department of Economics, Aarhus School of Business)

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.

Suggested Citation

  • Eriksson, Tor & Villeval, Marie-Claire, 2008. "Performance Pay, Sorting and Social Motivation," Working Papers 07-12, University of Aarhus, Aarhus School of Business, Department of Economics.
    • Handle: RePEc:hhs:aareco:2007_012
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    References listed on IDEAS

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    More about this item

    Keywords

    Performance pay; incentives; sorting; social motivation; experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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