Pay for Performance with Motivated Employees

Claudia Cerrone 1  and Ester Manna 2
  • 1 Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, Bonn, Germany
  • 2 Department of Economic Theory, Universitat de Barcelona, Av. Diagonal, 696, Barcelona, Spain
Claudia Cerrone
  • Corresponding author
  • Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113, Bonn, Germany
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and Ester Manna

Abstract

Heterogeneity in intrinsic motivation affects the optimal contract offered to employees in teams. Under individual incentives, the effort exerted by both motivated and selfish employees is distorted. This distortion is mitigated if employees receive a wage based on team performance. As a result, the principal prefers to use team incentives, while motivated employees are better off with individual incentives.

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