Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence
University of California, Los Angeles (UCLA) - Anderson School of Management
University of Michigan, Stephen M. Ross School of Business
September 9, 2011
Harvard Business School NOM Unit Working Paper No. 10-078
We investigate how the convexity of a firm’s incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate experimentally that overconfident employees are more likely to sort into a non-linear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to “sort in” (“sort away”) attractive (unattractive) employees; such schemes may also reduce a firm’s wage bill.
Number of Pages in PDF File: 40
Date posted: March 14, 2010 ; Last revised: September 9, 2011