Severe versus Lenient Internal Promotion: An Analysis of the Optimal Promotion Mechanism in Organizations

Abstract:     
This paper analyses the interaction between work incentives and talent selection in the framework of internal promotion, and investigates the kinds of promotion structures that are adopted in organizations. We compare the benefits of promoting a deserving agent with the costs of providing work incentives to him. It is shown that whether the principal intends to punish even the talented worker (severe promotion) or to reward even the untalented worker (lenient promotion) depends upon whether the benefits of promoting the former worker or the costs of promoting the latter worker are relatively large.

Number of Pages in PDF File: 16

JEL Classification: D29, J31

Accepted Paper Series