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Career-Based Incentives

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Career-Based Incentives Career-Based Incentives • Another important source of extrinsic motivation are the long-term incentives to advance worker’s career • Figure 1 presents data on salaries of employees of Acme at different hierarchical levels calculated at a single point in time • In this company there are 8 levels from entry-level management to the CEO • There is more than one kind of job at each level, but jobs within a level have very similar pay/presumably similar levels of responsibility and skills • The plot shows the mean level of salary (and 5th and 95th percentiles of salary among those in each job level Salary by Hierarchical Level Salary by Hierarchical Level Raise in Salary by Type of Job Change Raise in Salary by Type of Job Change Promotion and Incentives • The evidence indicates that an employee’s long-term career prospects, especially in the form of promotions, may often be an important source of incentives Should Promotions be used as an Incentive System? Intentional or accidental incentive system? What Promotion Rule Should be Used? What Promotion Rule Should be Used? How do promotions generate incentives? How do promotions generate incentives? How do promotions generate incentives? How Do promotions generate incentives: Level of Salary How Do promotions generate incentives: Prize from Promotion • Promotion incentives are large, the larger the raise earned upon promotion Effect of Promotion Probability ( ) ( ) effort pr promoted ∆ • How does the term ∆ affect incentives? • if a promotion is guaranteed, there is no incentive • if a promotion is impossible, there is no incentive • Implications How Do promotions generate incentives: Uncontrollable risk Promotions as Incentives: Summary • In many ways, tournaments and standards have the same implications for incentive plan design • The most important question is the size and prize for promotion • A good estimate would take into account the added value to the employee of better career prospects that come with the promotion Career Concerns • In an active labour market, employees may be motivated partly because good performance can lead to better employment opportunities outside the firm • This kind of incentive is often called career concerns

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