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Performance‐Related Pay, Efficiency Wages and the Shape of the Tenure‐Earnings Profile
Author(s) -
Sessions John G.,
Skåtun John D.
Publication year - 2017
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12147
Subject(s) - remuneration , economics , performance related pay , wage , earnings , human capital , labour economics , efficiency wage , agency (philosophy) , credibility , agency cost , wage inequality , microeconomics , finance , corporate governance , incentive , philosophy , epistemology , political science , law , economic growth , shareholder
Whilst it is well known that performance‐related pay (PRP) may increase wage inequality within a firm, there is an inter‐temporal lifecycle aspect that has been largely ignored in the literature. In this paper, we investigate theoretically how the introduction of PRP will influence the wage and remuneration profile over time. We develop a simple two‐period model of efficiency wages that rationalizes recent empirical findings suggesting PRP flattens the pay‐tenure profile. Such attenuation has important implications for the credibility of long‐term employment contracts as it suggests that agency rather than human capital considerations drive the profile.