INCENTIVE COMPENSATION IN A CORPORATE HIERARCHY

A theoretical and empirical analysis of within-job and promotion-based incentives for middle managers is presented, using personnal data from a firm. Within-job incentives are stronger than implied by previous studies. Evidence is provided that promotions sort employees by ability, and also generate incentives. Promotions are associated with large increases in lifetime earnings, as long as performance is sustained in the future. There is little evidence that the firm trades off within-job and promotion-based incentives as predicted. Instead, it appears to use a simple incentive scheme, resulting in declining incentives for those passed over for promotion.