Paid to Perform? Compensation Profiles Under Pure Wage and Performance Related Pay Arrangements

40 Pages Posted: 11 Apr 2011

See all articles by John G. Sessions

John G. Sessions

University of Bath; IZA Institute of Labor Economics

John Skatun

University of Aberdeen - Business School

Date Written: April 1, 2011

Abstract

Whilst existing efficiency wage literature assumes detection probabilities of shirkers are exogenous, this paper finds them positively and endogenously dependent on non-shirkers' effort. It shares the result with the endogenous monitoring models where, in some regions, workers reduce effort in response to higher wages, but differs in that firms never operate in those regions. The paper further provides theoretical reasons for the empirical regularity that increased usage of performance related pay (PRP) flattens the pay-tenure profile. Wages and effort increase over the lifecycle, both with and without PRP, but with late payments in PRP falling short of pure wage arrangements.

Keywords: monitoring, tenure, efficiency wages

JEL Classification: J33, J41, J54

Suggested Citation

Sessions, John G. and Skatun, John, Paid to Perform? Compensation Profiles Under Pure Wage and Performance Related Pay Arrangements (April 1, 2011). IZA Discussion Paper No. 5619, Available at SSRN: https://ssrn.com/abstract=1806420

John G. Sessions (Contact Author)

University of Bath ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

John Skatun

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

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