Incentive schemes, sorting and behavioral biases of employees
Subtitle: experimental evidence
By: Ian Larkin, Stephen Leider
Contributors: Leider, Stephen; Harvard Business School
Edition: Rev.
Series: Working paper / Harvard Business School -- 10-078; Working paper (Harvard Business School) -- 10-078
Publisher: Harvard Business School
Published: 2011
Place of publication: Boston]
Language: eng
Number of pages: 39
Description: We investigate how the convexity of a firm's incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate experimentally that overconfident employees are more likely to sort into a non-linear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to "sort in" ("sort away") attractive (unattractive) employees; such schemes may also reduce a firm's wage bill.
Notes: "March 2010, revised September 2011" -- Publisher's website.

"September 9, 2011" -- added t.p.

Previously published as: Why do firms use non-linear incentive schemes? : experimental evidence on sorting and overconfidence.

Includes bibliographical references.