Paid to Perform? Compensation Profiles Under Pure Wage and Performance Related Pay Arrangements
John G. Sessions
University of Bath; Institute for the Study of Labor (IZA)
University of Aberdeen - Business School
April 1, 2011
IZA Discussion Paper No. 5619
Whilst existing efficiency wage literature assumes detection probabilities of shirkers are exogenous, this paper finds them positively and endogenously dependent on non-shirkers' effort. It shares the result with the endogenous monitoring models where, in some regions, workers reduce effort in response to higher wages, but differs in that firms never operate in those regions. The paper further provides theoretical reasons for the empirical regularity that increased usage of performance related pay (PRP) flattens the pay-tenure profile. Wages and effort increase over the lifecycle, both with and without PRP, but with late payments in PRP falling short of pure wage arrangements.
Number of Pages in PDF File: 40
Keywords: monitoring, tenure, efficiency wages
JEL Classification: J33, J41, J54working papers series
Date posted: April 11, 2011
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