Effort and Self-Selection Effects of Compensation Scheme Changes under a Multi-output Setting

Abstract

The analytical research from agency theory suggests that an outputbased

compensation can have effort effects and self-selection effects.

This study extended Banker et al.'s recent study to a multi-output

setting and investigated those two effects in an insurance firm using

individual monthly sales data for multiple products as well as

employment history data. We have demonstrated that these two effects

exist under a multi-output setting. The results showed that

compensation scheme changes could induce sales mix changes by the

effort reallocation process. In addition sales performance of remaining

employees is better aligned with the new compensation scheme that

that of employees who had quit supporting the self-selection

hypothesis.