Performance Pay and Prior Learning—Evidence from a Retail Chain

Abstract

We report the results of two field experiments in a retail chain and show that the effectiveness of performance pay crucially hinges on prior job experience. Introducing sales-based performance pay first for district managers and later for store managers, we find negligible average treatment effects. From surveys and interviews, we develop a formal model demonstrating that the effect of performance pay decreases with experience and may even vanish in the limit. We provide empirical evidence in line with this hypothesis—for instance, finding positive treatment effects (only) in stores with low job experience. This paper was accepted by Yan Chen, decision analysis.