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Differentiation and Performance: An Empirical Investigation on the Incentive Effects of Bonus Plans

43 Pages Posted: 6 Nov 2011  

Patrick Kampkötter

University of Cologne - Department of Business Administration and Human Resource Management

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Abstract

It is often claimed that supervisors do not differentiate enough between high and low performing employees when evaluating performance. The purpose of this paper is to study the incentive effects of this behavior empirically. We first show in a simple model that the perceived degree of past differentiation affects future incentives. We then study the impact of differentiation empirically with a large panel data set spanning many firms in one industry. On average, stronger differentiation has a substantial positive effect on performance. This effect is larger on higher hierarchical levels. But differentiation may become harmful at the lowest levels.

Keywords: bonus payments, differentiation, subjective performance evaluation, incentives

JEL Classification: M52, D23

Suggested Citation

Kampkötter, Patrick and Sliwka, Dirk, Differentiation and Performance: An Empirical Investigation on the Incentive Effects of Bonus Plans. IZA Discussion Paper No. 6070. Available at SSRN: https://ssrn.com/abstract=1955410

Patrick Kampkötter (Contact Author)

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Cologne
Germany

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

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

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