Some Evidence on the Relationship Between Performance-Related Pay and the Shape of the Experience-Earnings Profile‪.‬

1. Introduction and Background In this paper we explore the shape of the experience-earnings profile for individuals employed under different types of contracts: fixed-wage, performance-related pay (PRP), and self-employment contracts. We follow Lazear (1979, 1981) and Lazear and Moore (1984) in hypothesizing that the slope of the experience-earnings profile reflects agency costs, and the reduction thereof, with increased agency costs inducing steeper profiles. If monitoring costs are high, firms may implement compensation schemes designed to encourage employees to self-select behavior in the firms' interests. One such scheme defers a substantial amount of compensation until the later years of tenure. The resulting experience-earnings profile provides a penalty for shirking (Lazear and Moore 1984).