Firm Performance Measures
This chapter deals with incentive schemes which are based on firm performance measures. It addresses the question whether it makes sense to pay workers according to firm’s performance. The answer will rest on a trade-off between misallocation and uncertainty. It is argued that firm performance measures reduce misallocation and associated costs while increasing uncertainty and thus entailing higher uncertainty compensation. Additionally, it is considered that firm performance measures are unattractive because they provoke free-riding. However, within hiddenaction models free-riding does generally not occur. The related literature is reviewed in Section 3.1. Because the benefit usually occurs at the firm level, firm performance measures are closely related to benefit signals. Section 3.2 presents a model describing the vice and virtue of benefit signals and contrasts it with an alternative that features a trade-off between misallocation and uncertainty compensation. Finally, Section 3.3 explains why firm performance measures resemble benefit signals in the sense that they tend to reduce misallocation and increase uncertainty of the worker’s income. This leads to the hypothesis that firm performance measures are more intensely employed if misallocation entails high costs. Then, empirical ways to test this hypothesis are discussed and Section 3.4 summarises the main ideas of this chapter.
KeywordsFirm Performance Benefit Signal Wage Rate Incentive Scheme Benefit Function
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