Market Competition and Effectiveness of Performance Pay: Evidence from the Field

39 Pages Posted: 7 Nov 2017 Last revised: 30 Apr 2018

See all articles by Pooyan Khashabi

Pooyan Khashabi

Ludwig Maximilian University of Munich - Institute for Strategy, Technology and Organization (ISTO)

Matthias Heinz

University of Cologne; Centre for Economic Policy Research (CEPR)

Nick Zubanov

Goethe University Frankfurt

Tobias Kretschmer

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management); Centre for Economic Policy Research (CEPR)

Guido Friebel

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 2018

Abstract

It is well-established that the effectiveness of pay-for-performance (PfP) schemes depends on employee- and organization-specific factors. However, less is known about the role of external forces. Investigating the role of market competition on the effectiveness of PfP, we theorize that there are two counteracting effects – business stealing and competitor response – that jointly generate an inverted U-shape relationship between PfP effectiveness and competition. Weak competition discourages effort response to PfP because there is little extra market to gain, while strong competition creates low incentives because competitors are more likely to respond. PfP hence has the strongest effect under moderate competition. Field data from a bakery chain and its competitive environment confirm our theory, allow us to empirically separate the business stealing and competitor response effects, and refute alternative explanations.

Keywords: pay for performance (PfP), management practices, market competition, business stealing, competitor response

Suggested Citation

Khashabi, Pooyan and Heinz, Matthias and Zubanov, Nick and Kretschmer, Tobias and Friebel, Guido, Market Competition and Effectiveness of Performance Pay: Evidence from the Field (April 24, 2018). Available at SSRN: https://ssrn.com/abstract=3065607 or http://dx.doi.org/10.2139/ssrn.3065607

Pooyan Khashabi (Contact Author)

Ludwig Maximilian University of Munich - Institute for Strategy, Technology and Organization (ISTO) ( email )

Kaulbachstr, 45
Munich, 80539
Germany
+49 89 2180 5415 (Phone)

Matthias Heinz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nick Zubanov

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Tobias Kretschmer

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Guido Friebel

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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