Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments

18 Pages Posted: 24 Apr 2001

See all articles by Volker Meier

Volker Meier

CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Ifo Institute for Economic Research at the University of Munich

Date Written: March 2001

Abstract

Two alternative relative compensation schemes are compared with respect to total output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.

Keywords: Tournament, Relative Compensation, Internal Labor Markets

JEL Classification: D23, J33, J41, M12

Suggested Citation

Meier, Volker, Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments (March 2001). Available at SSRN: https://ssrn.com/abstract=267678 or http://dx.doi.org/10.2139/ssrn.267678

Volker Meier (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Ifo Institute for Economic Research at the University of Munich ( email )

Poschingerstr. 5
Munich
Germany

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