An Empirical Examination of the Impacts from Termination of a Performance-Based Incentive Plan

Abstract

Although empirical evidence is beginning to document that pay for performance plans for frontline employees have positive effort and selection effects, many firms are curtailing these plans. This paper reports on the financial impacts from the termination of a pay for performance plan at a retail establishment. Using monthly panel data spanning more than eight years for 15 outlets of a retailer, this study documents that sales and operating profits decrease after the incentive plan's elimination. Analysis of individual employee sales data reveals that virtually all of the declining store level sales are due to selection effects.