Basic economic theory suggests that in a competitive labor market, each worker will be paid the value of his/her marginal productivity. In short, if your work adds $80,000 of value every year to the company for whom you work, then $80,000 is how much will be spent on employing you in the long-run. If they pay you too little, a competing company would be willing to hire you away since the value you bring is greater than the cost of employing you. Alternatively, if the company spends more on employing you than the value you bring, economic theory suggests that your salary will be reduced through decreased compensation and/or termination of employment.

Many times, employees and companies have difficulty determining just how much value is being added by each employee (i.e. how productive you are). Sometimes, due to the difficulty in directly observing productivity, firms utilize incentive mechanisms to ensure/increase productivity of its employees.

Attached is an article outlining different approaches to, and effects from, compensation and incentive schemes used in the workplace. This is by no means exhaustive, though. Think about the incentive schemes used at your current/previous employer. Why did they choose the mechanism to monitor/increase productivity? Do you feel it was the best approach they could’ve used? What could they have done differently?

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