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date: 25 February 2021

Abstract and Keywords

A large, mature and robust economics literature now provides a useful framework for understanding incentives. This chapter uses the lessons of that literature to discuss how to design and implement pay for performance in practice. A unified treatment of properties of numeric performance measures is provided, including how performance measures relate to employee knowledge and decision making. Subjective performance evaluation, and the tie of evaluations to rewards, are analyzed. Practical implementation issues, such as matching of pay for performance to job design, motivating creativity, and links between incentives and employee selection, are considered. The chapter concludes with suggested directions for future research.

Keywords: incentives, performance measurement, subjective evaluation, rewards, distortion, manipulation, decentralization, job design, creativity, ratchet effect

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