Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence

40 Pages Posted: 14 Mar 2010 Last revised: 9 Sep 2011

Ian Larkin

University of California, Los Angeles (UCLA) - Anderson School of Management

Stephen Leider

University of Michigan, Stephen M. Ross School of Business

Date Written: September 9, 2011

Abstract

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.

Suggested Citation

Larkin, Ian and Leider, Stephen, Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence (September 9, 2011). Harvard Business School NOM Unit Working Paper No. 10-078. Available at SSRN: https://ssrn.com/abstract=1569688 or http://dx.doi.org/10.2139/ssrn.1569688

Ian Larkin (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Stephen Leider

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

HOME PAGE: http://www-personal.umich.edu/~leider/

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