Do fixed payments affect effort? Examining relative thinking in mixed compensation schemes

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Abstract

Several earlier studies have shown that people exhibit “relative thinking”: they consider relative price differences even when only absolute price differences are relevant. The article examines whether relative thinking exists when people face mixed compensation schemes that include both fixed and pay-for-performance components. Such compensation schemes are prevalent in many occupations (e.g., salespeople and managers) and therefore are an important practical issue. Surprisingly, the ratio between the pay-for-performance and the fixed compensation does not affect effort, meaning that no relative thinking is found. Another experiment shows that this is not due to reciprocity that cancels out relative thinking. In a third experiment subjects make similar decisions without incentives and the results suggest that the different context (compensation schemes instead of price comparisons) and not the introduction of financial incentives (which were not used in previous studies) is the reason that relative thinking disappears. The results have implications for designing incentive schemes in firms and for designing experiments.

Original languageEnglish
Pages (from-to)52-66
Number of pages15
JournalJournal of Economic Psychology
Volume70
DOIs
StatePublished - 1 Jan 2019

Keywords

  • 2300 Human Experimental Psychology
  • 2340 Cognitive Processes
  • 3600 Industrial & Organizational Psychology
  • 3900 Consumer Psychology
  • Compensation schemes
  • Heuristics and biases
  • Judgment and decision making
  • Pay-for-performance
  • Relative thinking

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