An Empirical Analysis of Continuing Improvements Following the Implementation of a Performance-Based Compensation Plan
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Banker, Rajiv D.; Lee, Seok-Young; Potter, Gordon S.; Srinivasan, Dhinu
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/or 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.
salesforce compensation; pay-for-performance; self-selection; incentive plans; moral hazard; productivity improvement
Required Publisher Statement: © Elsevier . Final version published as: Banker, R. D., Lee, S., Potter, G., & Srinivasan, D. (2000). An empirical analysis of continuing improvements following the implementation of a performance-based compensation plan. Journal of Accounting and Economics, 30(3), 315-350. doi:10.1016/S0165-4101(01)00016-7 Reprinted with permission. All rights reserved.