DOES DEFERRED COMPENSATION INCREASE WORKER EFFORT?

This paper presents a model illustrating that deferred compensation increases effort (reduces shirking) by increasing the cost of job loss. Importantly, the size of this increase in effort shrinks as the chance of exogenous job separation grows. The paper tests the model's predictions using both US and Australian data. In both countries we find empirical results consistent with the model's predictions. Deferred compensation, as identified either by pensions or by steeper tenure–wage profiles, is associated with greater self‐reported worker effort. Moreover, when the probability of job separation is greater, the influence of deferred compensation diminishes.