When high-powered incentive contracts reduce performance: choking under pressure as a screening device

Arbeitspapier

Empirical and experimental papers find that high-powered incentives may reduce performance rather than improve it; a phenomenon referred to as choking under pressure. We show that competition for high ability workers nevertheless leads firms to offer high bonus payments, thereby deliberately accepting pressure-induced performance reductions. Bonus payments allow for a separating equilibrium in which only high ability workers choose high-powered incentive contracts. Low ability workers receive fixed payments and produce their maximum output which, however, is still below the reduced output of high ability workers. Bonus payments lead to a social loss which is increasing in the degree of competition. Our paper helps to explain why steep incentive schemes are persistent in highly-competitive industries such as investment banking, and why the observed performance sensitivity of CEO compensation is largely heterogeneous.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Frankfurt School - Working Paper Series ; No. 135

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Economics of Contract: Theory ; Wage Level and Structure; Wage Differentials ; Compensation Packages; Payment Methods
• Thema: Performance-related pay ; screening ; choking under pressure ; competition

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Bannier, Christina E. ; Feess, Eberhard
• Ereignis: Veröffentlichung
• (wer): Frankfurt School of Finance & Management
• (wo): Frankfurt a. M.
• (wann): 2010

Weitere Informationen

• Handle: http://hdl.handle.net/10419/30169
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ