The Effects of Contract Design and Implementation Practiceson Worker Incentive Plan Outcomes

Abstract:     
Key issues in the design of incentive plans include the choice of performance measures, the level of pay-performance sensitivity, and the use of individual versus group payouts. In addition, research suggests that implementation issues can also have significant effects on incentive plan outcomes. Using a sample of 462 worker (non-management) incentive plans, we examine a wide variety of measurement, contractual and implementation practices, and investigate their individual and joint effects on incentive plan outcomes. Despite the emphasis on performance measurement choices in past compensation studies, we find evidence that other contractual and implementation characteristics have equal or greater influence on plan outcomes, and that many of these features interact to impact performance in a non-linear fashion.

Number of Pages in PDF File: 53

Keywords: worker incentives; performance measurement; implementation of incentive plans

JEL Classification: J33; M12; M52

working papers series