Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments
CESifo, Munich, 2001
CESifo Working Paper No. 432
![](https://cesifo.org/DocImg/cesifo_wp432.jpg?c=1689236935)
Two alternative relative compensation schemes are compared with respect to total output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.