Fairness Properties of Compensation Schemes

Christoph Becker, Dietmar Fehr, Hannes Rau, Stefan T. Trautmann and Yilong Xu

No 11943, CESifo Working Paper Series from CESifo

Abstract: How do different characteristics of pay-for-performance schemes affect fairness perceptions? In two studies, we systematically consider three major classes of incentive schemes: continuous piece rate incentives, discrete bonus schemes, and tournament incentives. We find that pay inequality has a strong negative effect on perceived fairness. Controlling for pay inequality, people consider piece rate schemes fairer than those with a discrete bonus and a tournament design in particular. Adding performance-dependent resource advantages or handicaps negatively influences perceived fairness. We find that procedural fairness judgments are an important factor influencing overall judgments and demonstrate in a third study that the latter have relevant behavioral consequences.

Keywords: incentives; merit; contract design; fairness; inequality (search for similar items in EconPapers)
JEL-codes: C90 D63 J31 J41 (search for similar items in EconPapers)
Date: 2025
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