Wage Structure and the Incentive Effect of Promotions

Working Paper Series
Tinbergen Institute Discussion Paper No. TI 04-107/3. MAY 2004
AUTHOR:
MARCO VAN HERPEN
MIRJAM VAN PRAAG
KEES COOLS

ABSTRACT:

 This paper studies wage structure characteristics and their consequent incentive effects empirically. Based on personnel records and an employee survey, we provide evidence that wages are attached to jobs and that promotions play a dominant role as a wage determinant. Our findings indicate furthermore that a promotion affects both intrinsic and extrinsic motivation significantly, though in two different ways: an expected promotion increases extrinsic motivation whereas intrinsic motivation is highest subsequent to a realized promotion. The relationship between extrinsic motivation and expected promotions implies that promotions have a clear incentive effect, consistent with a key – not yet tested - assumption of the tournament model.

Keywords: promotions, incentives, tournament model, internal labor market, extrinsic
motivation, intrinsic motivation

FULL TEXT: FREE DOWNLOAD VAN HERPEN 2004