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Promotion Tournaments and Individual Performance Pay
Author(s) -
Schöttner Anja,
Thiele Veikko
Publication year - 2010
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2010.00267.x
Subject(s) - incentive , promotion (chess) , principal (computer security) , private information retrieval , selection (genetic algorithm) , microeconomics , business , public economics , pay for performance , marketing , economics , computer science , computer security , political science , artificial intelligence , politics , law
We analyze the optimal combination of promotion tournaments and linear individual performance pay in an employment relationship. An agent's effort is nonobservable and he has private information about his suitability for promotion. Thus, the two incentive schemes need to be combined to serve both incentive and selection purposes. If harder working agents respond less to intensified effort incentives, we find that the principal puts less emphasis on individual performance pay when selection becomes more important. Thus, we provide a possible explanation as to why, in practice, individual performance pay is less prevalent than promotion‐based incentives.