Heterogeneous Effects of Performance Pay with Market Competition: Evidence from a Randomized Field Experiment

43 Pages Posted: 12 Dec 2017

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

University of Konstanz

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: November 2017

Abstract

It is well established that the effectiveness of pay-for-performance (PfP) schemes depends on employee- and firm-specific factors. Much less is known about the role of factors outside the firm. We investigate the role of market competition on the effectiveness of PfP. Our theory posits that there are two counteracting effects, a business stealing and a competitor response effect, that jointly generate an inverted U-shape relationship between PfP effectiveness and competition. Weak competition creates low incentives to exert effort because there is little extra market to gain, while strong competition creates low incentives as competitors respond more. PfP hence has the strongest effect for moderate competition. We test this prediction with a field experiment on a retail chain which confirms our theory and refutes alternative explanations.

Keywords: business stealing, competitor response, Management Practices, market competition, pay for performance (PfP)

Suggested Citation

Khashabi, Pooyan and Heinz, Matthias and Zubanov, Nick and Kretschmer, Tobias and Friebel, Guido, Heterogeneous Effects of Performance Pay with Market Competition: Evidence from a Randomized Field Experiment (November 2017). CEPR Discussion Paper No. DP12474. Available at SSRN: https://ssrn.com/abstract=3082340

Pooyan Khashabi

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

University of Konstanz ( email )

Fach D-144
Universitätsstraße 10
Konstanz, D-78457
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 (Contact Author)

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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