Or so I am told! Dubey and Geanakoplos argue that employers should use status incentives more for lower skilled workers, and monetary incentives more for higher skilled workers. That sounds counterintuitive, but here is their explanation:
……status incentive derives from the change in status that effort can bring, not from the level of status one winds up with.
In this model, once you’re CEO, you can only feel so much better about yourself, so that is a relatively inefficient incentive. (An alternative take is that the CEO is the one with the addiction to status.) On the other hand:
The deeper explanation is that with meritocratic pay schedules, a wage hike between low and middling performance forces a higher wage for all superior performance, and is therefore very expensive, while the same wage hike between excellent and the best performance does not necessitate any further raises. Thus the more that status incentives can substitute for pay hikes at low performance levels, the less the total wage bill.
If you give the CEO a raise, or maybe embedded stock options, you don’t have to give many other people a comparable boost to preserve ordinal parity.
Here are a few versions of the paper, somehow my pile ended up with a May 2016 version, though I don’t yet see that on-line. I thank whoever sent me this, your name is lost in the dustbin of history.