@techreport{Bannier2010When,
abstract = {Empirical and experimental papers find that high-powered incentives may reduce performance rather than improve it; a phenomenon referred to as choking under pressure. We show that competition for high ability workers nevertheless leads firms to offer high bonus payments, thereby deliberately accepting pressure-induced performance reductions. Bonus payments allow for a separating equilibrium in which only high ability workers choose high-powered incentive contracts. Low ability workers receive fixed payments and produce their maximum output which, however, is still below the reduced output of high ability workers. Bonus payments lead to a social loss which is increasing in the degree of competition. Our paper helps to explain why steep incentive schemes are persistent in highly-competitive industries such as investment banking, and why the observed performance sensitivity of CEO compensation is largely heterogeneous.},
address = {Frankfurt, M.},
author = {Christina E. Bannier and Eberhard Feess},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {D86; J31; J33; 330; Performance-related pay; screening; choking under pressure; competition},
language = {eng},
number = {135},
publisher = {Frankfurt School of Finance & Management},
title = {When high-powered incentive contracts reduce performance: choking under pressure as a screening device},
type = {Working paper series // Frankfurt School of Finance & Management},
url = {http://hdl.handle.net/10419/30169},
year = {2010}
}

