Impact of an equal pay norm on the optimal design of incentive contracts

Michael Krapp () and Kai Sandner ()
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Michael Krapp: University of Augsburg
Kai Sandner: LMU – Munich School of Management

Journal of Business Economics, 2016, vol. 86, issue 3, No 4, 338 pages

Abstract: Abstract Many firms do consider an equal pay norm when designing incentive contracts for their employees. This will affect the insights achieved in literature on incentive provision for multiple agents in a firm. We find that the consideration of an equal pay norm leads to less high-powered incentives and provides a rationale for the application of team-based compensation (TBC). When performance measures are positively correlated TBC can still be preferred over otherwise optimal relative performance evaluation schemes. What is more, the consideration of an equal pay norm makes mutual monitoring and coordination between agents more desirable than individual agent behavior. Finally, an increasing firm size decreases the desirability of individual agent behavior and correspondingly makes TBC even more attractive.

Keywords: Equal pay norm; Wage compression; Relative performance evaluation; Team-based compensation; Cooperation (search for similar items in EconPapers)
JEL-codes: C7 J3 L2 M4 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s11573-015-0779-z

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