An Empirical Examination of the Impacts from Termination of a Performance-Based Incentive Plan

Posted: 3 Jan 2005

See all articles by Dhinu Srinivasan

Dhinu Srinivasan

University of Pittsburgh - Katz Graduate School of Business

Rajiv D. Banker

Temple University - Department of Accounting

Seok-Young Lee

Sungshin Women's University

Gordon Potter

Cornell University - School of Hotel Administration

Date Written: 2004

Abstract

Although empirical evidence is beginning to document that pay for performance plans for frontline employees have positive effort and selection effects, many firms are curtailing these plans. This paper reports on the financial impacts from the termination of a pay for performance plan at a retail establishment. Using monthly panel data spanning more than eight years for 15 outlets of a retailer, this study documents that sales and operating profits decrease after the incentive plan's elimination. Analysis of individual employee sales data reveals that virtually all of the declining store level sales are due to selection effects.

Keywords: pay for performance, agency theory, termination of incentive plan, selection effects

JEL Classification: M41, M46, J33

Suggested Citation

Srinivasan, Dhinu and Banker, Rajiv D. and Lee, Seok-Young and Potter, Gordon S., An Empirical Examination of the Impacts from Termination of a Performance-Based Incentive Plan (2004). Available at SSRN: https://ssrn.com/abstract=638921 or http://dx.doi.org/10.2139/ssrn.638921

Dhinu Srinivasan (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States
412-648-1513 (Phone)
412-648-1693 (Fax)

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Seok-Young Lee

Sungshin Women's University ( email )

249-1 Dong-Dong 3-Ka Sungbuk-Ku
Department of Business Administration
Seoul 136-742
KOREA
+82 2 920-7464 (Phone)
+82 2 920-7363 (Fax)

Gordon S. Potter

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States
607-255-8061 (Phone)
607-255-4179 (Fax)

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