Performance Pay, Sorting and Employers Choice

Timo Hoffmann

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: In this paper I analyze the attractiveness of a rank-order tournament if both market sides, employers and workers, can choose between several payment systems. I consider the self-selection of workers into different payment schemes, their effort provisions and the payment system choices of managers in a real effort laboratory experiment. Depending on the stage of the experiment, workers are either randomly tied to a manager or are sorted into the available payment schemes (a fixed wage, a piece-rate or a rank-order tournament) according to their preferences. When managers decide over the payment systems a cheap (low prize) tournament yields larger profits for the managers than a piece-rate contract. This is not the case for high prize tournaments. Furthermore, with worker choices I find a clear self-selection pattern: More productive workers self-selected into the variable payment schemes (piece-rate and tournament) and most workers prefer the safer option piece-rate to the tournament. Especially the low prize tournament is not chosen by many productive workers. As a consequence, even the low prize tournament does not yield larger profits than the piece-rate contract to managers. These findings show that in conditions in which a piece-rate payment is possible, rank-order tournaments are not simultaneously attractive for workers and employers.

JEL-codes: C91 D81 J31 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112968

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