Article | Strategic Management Journal | October, 2012

The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees

Keywords: Cost; Compensation and Benefits; Motivation and Incentives; Strategy; Employees;

Format: Print

Citation:

Larkin, Ian, L. Pierce, and F. Gino. "The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees." Strategic Management Journal 33, no. 10 (October, 2012): 1194–1214.

This is information for one of the six roles to be used in the V-Cola negotiation exercise. Please see V-Cola General Instructions (912043) and Teaching note (912042) for full information.

This paper investigates the pricing distortions that arise from the use of a common non-linear incentive scheme at a leading enterprise software vendor. The empirical results demonstrate that salespeople are adept at gaming the timing of deal closure to take advantage of the vendor's accelerating commission scheme. Specifically, salespeople agree to significantly lower pricing in quarters where they have a financial incentive to close a deal, resulting in mispricing that costs the vendor 6-8% of revenue. Robustness checks demonstrate that price discrimination by the vendor does not explain the identified effects.

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