Performance Pay, Risk Attitudes and Job Satisfaction

42 Pages Posted: 20 Oct 2008

See all articles by Thomas Cornelissen

Thomas Cornelissen

University College London

John S. Heywood

University of Wisconsin at Milwaukee

Uwe Jirjahn

University of Trier - Faculty of Economics

Date Written: October 2008

Abstract

We present a sorting model in which workers with greater ability and greater risk tolerance move into performance pay jobs and contrast it with the classic agency model of performance pay. Estimates from the German Socio-Economic Panel confirm testable implications drawn from our sorting model. First, prior to controlling for earnings, workers in performance pay jobs have higher job satisfaction, a proxy for on-the-job utility. Second, after controlling for the higher earnings associated with performance pay, the job satisfaction of those in performance pay jobs is the same as those not in such jobs. Third, those workers in performance pay jobs who have greater risk tolerance routinely report greater job satisfaction. While these findings support the sorting model, they would not be suggested by the classic agency model.

Keywords: Performance Pay, Worker Heterogeneity, Ability, Risk Preferences, Sorting

JEL Classification: D80, J24, J28, J33, M52

Suggested Citation

Cornelissen, Thomas and Heywood, John S. and Jirjahn, Uwe, Performance Pay, Risk Attitudes and Job Satisfaction (October 2008). SOEPpaper No. 136. Available at SSRN: https://ssrn.com/abstract=1285538 or http://dx.doi.org/10.2139/ssrn.1285538

Thomas Cornelissen

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

John S. Heywood

University of Wisconsin at Milwaukee ( email )

3210 N. Maryland Avenue, Bolton Hall 802
Bolton Hall 802
Milwaukee, WI 53211
United States
414-229-4437 (Phone)
414-229-3860 (Fax)

Uwe Jirjahn (Contact Author)

University of Trier - Faculty of Economics ( email )

Trier, 54286
Germany

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