Performance Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile

John G. Sessions; John D. Skatun

doi:10.1111/manc.12147

Performance Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile

John G. Sessions, John D. Skatun

Economics

University of Bath

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Abstract

Whilst it is well known that performance related pay (PRP) may increase wage inequality within a firm, there is an inter-temporal, lifecycle aspect that has been largely ignored in the literature. In this paper we investigate theoretically how the introduction of PRP will influence the wage and remuneration profile over time. We develop a simple two-period model of efficiency wages that rationalises recent empirical findings suggesting that performance related pay (PRP) flattens the pay-tenure profile. Such attenuation has important implications for the credibility of long-term employment contracts since it suggests that agency rather than human capital considerations drive the profile.

Original language	English
Pages (from-to)	295-319
Number of pages	25
Journal	The Manchester School
Volume	85
Issue number	3
Early online date	18 Feb 2017
DOIs	https://doi.org/10.1111/manc.12147
Publication status	Published - Jun 2017

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This is the peer reviewed version of the following article: [Sessions, J. G. and Skåtun, J. D. (2017), Performance-Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile. The Manchester School, 85: 295–319], which has been published in final form at DOI: 10.1111/manc.12147. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Accepted author manuscript, 3.71 MBLicence: Unspecified

John Skatun
- Business School, Business Management - Head of School
- Business School, Economics - Chair in Economics
- Business School, Centre for Labour Market Research (CeLMR)
Person: Academic

Cite this

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Performance Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile

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