Using real-effort laboratory experiments with salient incentives, we examine the impact of pay-for-performance (PFP) versus fixed-salary (FS) compensation on productivity. PFP achieved significantly higher productivity through both sorting and incentive effects. In particular, more productive employees selected PFP, and employees on average, regardless of their preferred compensation scheme, produced more under PFP. Risk preferences were also important. Less risk-averse individuals were both more likely to select PFP and also more responsive to PFP incentives.

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