Performance pay, risk attitudes and job satisfaction

We present a model in which workers with greater ability and greater risk tolerance move into performance pay jobs to capture rents and contrast it with the classic agency model. Estimates from the German Socio-Economic Panel confirm testable implications drawn from our model. First, before controlling for earnings, workers in performance pay jobs have higher job satisfaction, a proxy for on-the-job utility. Second, after controlling for earnings, workers in jobs with performance pay have the same job satisfaction as those not in such jobs. Third, those workers in performance pay jobs who have greater risk tolerance routinely report greater job satisfaction. While these findings support models in which workers capture rent, they would not be suggested by the classic agency model. (c) 2010 Elsevier By. All rights reserved.