Premium Incentive

In: Science

Submitted By randykelvianto
Words 5213
Pages 21
Tournaments and Piece Rates Revisited:
A Theoretical and Experimental Study of Premium Incentives
Werner Guth Rene Levnsky Kerstin Pully Ori Weiselz
June 22, 2010
Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on xed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like xed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the rm's success: the prize is high if the rm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform xed-prize tournaments as well as piece rates. Our theoretical result is qualitatively con rmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems.
JEL Classi cation: C72, C91, J33
Keywords: Tournaments, Incentives, Economic experiments
Max Planck Institute for Economics, Kahlaische Strasse 10, 07745 Jena, Germany. yEberhard Karls Universitat Tubingen, Faculty of Economics and Business Administration, Nauklerstrasse
47, 72074 Tubingen, Germany. zThe Hebrew University, Center for the Study of Rationality, Giv'at Ram, Jerusalem 91904, Israel.
1 Introduction and Motivation
As documented by Orrison et al. (2004) or Bothner et al. (2007), tournament incentives have developed into an increasingly important component of compensation systems; they are `pervasive in organizations' (Casas-Arce and Martnez-Jerez, 2009). Unlike piece rates, which are awarded according to absolute performance, tournament incentives are awarded…...

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