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http://ssrn.com/abstract=94029
 
 

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Compensation and Incentives: Practice vs. Theory


George P. Baker


HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)

Michael C. Jensen


Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Kevin J. Murphy


University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law


Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Journal of Finance, Vol. 63, No. 3, pp. 593-616, July 1998

Abstract:     
A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory--including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic--focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.

Number of Pages in PDF File: 38

JEL Classification: G31, G32, J31, J33

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Date posted: September 24, 1998  

Suggested Citation

Baker, George P. and Jensen, Michael C. and Murphy, Kevin J., Compensation and Incentives: Practice vs. Theory. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998; Journal of Finance, Vol. 63, No. 3, pp. 593-616, July 1998. Available at SSRN: http://ssrn.com/abstract=94029 or http://dx.doi.org/10.2139/ssrn.94029

Contact Information

George P. Baker (Contact Author)
HBS Negotiations, Organizations and Markets Unit ( email )
Soldiers Field
Boston, MA 02163
United States
617-495-6119 (Phone)
617-496-4191 (Fax)
HOME PAGE: http://www.people.hbs.edu/gbaker/index.html
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Michael C. Jensen
Harvard Business School ( email )
Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States
617-510-3363 (Phone)
305-675-3166 (Fax)
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484
Social Science Electronic Publishing (SSEP), Inc. ( email )
7858 Sanderling Road
Sarasota, FL 34242
United States
617-510-3363 (Phone)
305 675-3166 (Fax)
HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Kevin J. Murphy
University of Southern California - Marshall School of Business ( email )
BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

University of Southern California - Department of Economics
3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
USC Gould School of Law
699 Exposition Boulevard
Los Angeles, CA 90089
United States

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