Relative Performance Pay, Bonuses, and Job-Promotion Tournaments

Matthias Kräkel and Anja Schöttner

No 3702, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments.

Keywords: bonuses; external recruitment; job promotion; limited liability; tournaments (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2008-09
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://docs.iza.org/dp3702.pdf (application/pdf)

Related works:
Working Paper: Relative Performance Pay, Bonuses, and Job-Promotion Tournaments (2008)
Working Paper: Relative Performance Pay, Bonuses, and Job-Promotion Tournaments (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp3702

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().