An Empirical Analysis of Continuing Improvements Following the Implementation of a Performance-Based Compensation Plan

Performance improvements subsequent to the implementation of a pay-for-performance plan may result either because more productive employees self-select into the firm (selection effect) and/or because employees allocate more effort to learn how to perform their tasks better (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sources of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these employees to further improve their productivity. In contrast, the less productive sales employees? performance declines before they leave the firm.