Whilst it is well known that performance related pay (PRP) may increase wage inequality within a firm, there is an inter-temporal, lifecycle aspect that has been largely ignored in the literature. In this paper we investigate theoretically how the introduction of PRP will influence the wage and remuneration profile over time. We develop a simple two-period model of efficiency wages that rationalises recent empirical findings suggesting that performance related pay (PRP) flattens the pay-tenure profile. Such attenuation has important implications for the credibility of long-term employment contracts since it suggests that agency rather than human capital considerations drive the profile.
Sessions, J. G., & Skatun, J. D. (2017). Performance Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile. The Manchester School, 85(3), 295-319. https://doi.org/10.1111/manc.12147