An empirical analysis of continuing improvements following the implementation of a performance-based compensation plan

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Journal of Accounting and Economics, ISSN: 0165-4101, Vol: 30, Issue: 3, Page: 315-350

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Banker, Rajiv D.; Lee, Seok-Young; Potter, Gordon S.; Srinivasan, Dhinu
Elsevier BV
Business, Management and Accounting; Economics, Econometrics and Finance; salesforce compensation; pay-for-performance; self-selection; incentive plans; moral hazard; productivity improvement; Accounting; Performance Management
article description
Performance improvements subsequent to the implementation of a pay-for-performance plan can result because more productive employees self-select into the firm (selection effect) and because employees allocate effort to become more effective (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sources of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these employees to further improve their productivity. In contrast, the less productive sales employees’ performance declines before they leave the firm.