Setting incentives: Temporary performance premiums versus promotion tournaments

Volker Meier

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: Two alternative relative compensation schemes are compared with respect to the output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result is obtained because a promotion regime allows a distortion in a contest in favor of winners of previous contests.

Date: 2004
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Published in Labour 4 18(2004): pp. 661-674

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Journal Article: Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments (2004)
Working Paper: Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments (2001)
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