Promotion Incentives, Performance Pay, and Human Capital Acquisition

Abstract

The paper provides empirical evidence how promotion incentives and performance pay are related to nonverifiable human capital acquisition contingent on its grade of firm specificity. Consistent with Prendergast (1993), I document that promotion incentives are positively related to nonverifiable firm-specific human capital acquisition whereas individual performance pay (i.e., piece rates or productivity payments) is not related to such acquisition. If human capital is general rather than firm-specific, i.e., can also be utilized in other firms (Becker, 1962), I find that individual performance pay is positively related to such general human capital acquisition and there is no such relation for promotion incentives.