What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies

with the compensation policies of firms. This literature is considered from the perspective of three major theories: human capital, learning, and incentives. Considerable empirical work has addressed each of these theories with some success. However, our understanding of the effect of compensation on behavior and of the motivations for firms in choosing certain policies has been constrained by two important problems. First, the absence of data on contracts and performance has limited the ability of researchers to ask even the most basic question, Do Incentives Matter? Second, the available theoretical work has not been sufficiently orientated towards distinguishing between plausible alternatives, so that many observed facts are consistent with any of the major theories.

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