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We report the results of two field experiments in a retail chain and show that the effectiveness of performance pay crucially hinges on prior job experience. Introducing sales-based performance pay first for district managers and later for store managers, we find negligible average treatment effects. From surveys and interviews, we develop a formal model demonstrating that the effect of performance pay decreases with experience and may even vanish in the limit. We provide empirical evidence in line with this hypothesis—for instance, finding positive treatment effects (only) in stores with low job experience. This paper was accepted by Yan Chen, decision analysis.
The incentive impact of the fixed wage-A real effort experiment ** According to most simple agency models only the performance dependent part of the compensation drives the agent's effort decision. However, we show that this is not necessarily the case for reference dependent and loss averse agents. Based on Pokorny (2008) we firstly analyze the impact of the fixed wage on work performance within a linear incentive contract when agents are loss averse. Secondly, we test the resulting hypotheses in an economic real effort experiment. Varying the fixed wage but keeping the piece rate constant over treatments, we find a non-monotonic slope of effort in the fixed payment with significantly higher effort levels for a very low fixed wage. Very high fixed payments also yield higher subject performance but to a minor and less robust extent. Die Anreizwirkung von Fixlöhnen-Ein Real Effort Experiment Ein typisches Ergebnis einfacher Prinzipal-Agent-Modelle ist, dass die Arbeitsanstrengung des Agenten lediglich vom leistungsabhängigen Teil der Vergütung getrieben wird. In dieser Arbeit wird gezeigt, dass dies nicht notwendigerweise gilt, wenn Agenten referenzpunktabhängige Präferenzen und Verlustaversion aufweisen. Zunächst wird basierend auf einem Modell von Pokorny (2008) analysiert, wie der Fixlohn die Arbeitsanstrengung innerhalb eines linearen Anreizvertrages bei Verlustaversion beeinflusst. Darauffolgend werden die resultierenden Hypothesen in einem ökonomischen Experiment mit realen Anstrengungen getestet. Bei variierenden fixen, zugleich aber konstanten Stücklöhnen zeigen die Resultate einen nicht-monotonen Verlauf der Leistungsergebnisse im Fixlohn. Bei sehr niedrigem treten signifikant bessere Leistungsergebnisse auf als bei einem mittleren Niveau. Auch sehr hoher Fixlohn steigert die Performance der Probanden, allerdings nicht so stark und auch weniger robust..
We investigate the causal effect of performance pay and conversations about performance in 224 stores of a retail chain implementing a field experiment with a 2x2 factorial design. In the performance pay treatments, managers receive a bonus, which is a simple linear function of the profits achieved above a threshold value. In the performance review treatments, managers have to report their activities undertaken to increase profits in regular meetings. We find that whereas performance pay did not yield significant profit increases, performance review conversations increased profits by about 7%. However, when additionally receiving performance pay, the positive effect of performance reviews vanished. We provide evidence from surveys and meeting protocols that performance pay changes the nature of conversations, leading to a stronger self-reliance of store managers, which undermines the value of the performance reviews. This paper was accepted by Yan Chen, behavioral economics and decision analysis.
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