An empirical analysis of continuing improvements following the implementation of a performance-based compensation plan

Performance improvements subsequent to the implementation of a pay-for-perf ormance plan can result because more productive employees self-select into the firm (selection effect) and because employees allocate effort to become more effective (effort effect). We analyze individual performance data for 3,776 sales employees of a retail firm to evaluate these alternative sourc es of continuing performance improvement. The incentive plan helps the firm attract and retain more productive sales employees, and motivates these em ployees to further improve their productivity. In contrast, the less produc tive sales employees' performance declines before they leave the firm. (C) 2001 Elsevier Science B.V. All rights reserved.