Performance‐Related Pay, Efficiency Wages and the Shape of the Tenure‐Earnings Profile

25 Pages Posted: 7 Apr 2017

See all articles by John G. Sessions

John G. Sessions

University of Bath; IZA Institute of Labor Economics

John D. Skåtun

University of Aberdeen - Business School

Date Written: June 2017

Abstract

Whilst it is well known that performance‐related pay (PRP) may increase wage inequality within a firm, there is an inter‐temporal lifecycle aspect that has been largely ignored in the literature. In this paper, we investigate theoretically how the introduction of PRP will influence the wage and remuneration profile over time. We develop a simple two‐period model of efficiency wages that rationalizes recent empirical findings suggesting PRP flattens the pay‐tenure profile. Such attenuation has important implications for the credibility of long‐term employment contracts as it suggests that agency rather than human capital considerations drive the profile.

Suggested Citation

Sessions, John G. and Skåtun, John D., Performance‐Related Pay, Efficiency Wages and the Shape of the Tenure‐Earnings Profile (June 2017). The Manchester School, Vol. 85, Issue 3, pp. 295-319, 2017, Available at SSRN: https://ssrn.com/abstract=2946557 or http://dx.doi.org/10.1111/manc.12147

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 D. Skåtun

University of Aberdeen - Business School ( email )

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

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