Performance Contests and Merit Pay with Empathic Employees

Fabel, Oliver; Mauser, Sandra; Zhang, Yingchao

Abstract

This paper studies the behavioral responses of employees who are endowed with empathic abilities to
different institutional designs of incentive pay. Empathic abilities motivate altruistic behavior by sensing
the other’s feelings towards oneself. In performance contests, empathic individuals withhold effort, most
(less) strongly when facing a non-empathic (empathic) contestant. Effort levels of both non-empathic and
empathic individuals increase with a higher probability that the contestant is of their own type. By
developing a theoretical model, our analysis contributes to understanding observed individual behavior in
experiments and corresponding econometric evidence. With direct merit pay, effort choices only depend on
the signaling quality of the performance measure. Individuals with stronger empathic abilities may shy away
from performance contests to, instead, receive merit pay. If gender governs empathic abilities, setting
incentives by performance contests cannot simultaneously ensure equal pay and equal opportunities.

Citation

Fabel, O., Mauser, S., & Zhang, Y. (2023). Performance Contests and Merit Pay with Empathic Employees. Managerial and Decision Economics, https://doi.org/10.1002/mde.4003

• Journal Article Type: Article
• Acceptance Date: Aug 27, 2023
• Online Publication Date: Sep 20, 2023
• Publication Date: 2023
• Deposit Date: Sep 25, 2023
• Publicly Available Date: Sep 25, 2023
• Journal: Managerial and Decision Economics
• Print ISSN: 0143-6570
• Electronic ISSN: 1099-1468
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1002/mde.4003
• Public URL: https://durham-repository.worktribe.com/output/1747370