This chapter instills an appreciation for the powerful effects (both positive and negative) of performance pay on employee behavior. It opens with a performance-pay success story, namely a field experiment by Shearer (2004) in which the piece-rate compensation of Canadian tree planters was changed. It then develops some examples of the darker side of performance pay, including the Wells Fargo employees who opened false accounts to meet a quota. Section 9.2 provides visual representations of performance pay in which the pay graph has a positive slope (i.e., it increases when the worker’s performance measure increases), sometimes linearly as with piece-rate pay and sometimes nonlinearly as with bonuses. The chapter emphasizes the incentive and sorting effects associated with performance pay as well as its prevalence. Workers’ attitudes towards risk (of earnings fluctuations) and how risk affects performance pay is covered, along with performance measurement, various drawbacks of performance pay, and how to design performance-pay contracts. Readers will finish the chapter with an understanding of the advantages and disadvantages of performance pay and when it can be effectively used.

Some interpersonal interactions involve substantial trust, while others do not. The interaction between an infirm, elderly parent who needs personal care or management of assets and an adult child who undertakes to provide it is an example of a relationship that typically involves substantial trust. Some other interactions, however, even long-term interactions or those between repeat players, can require much less trust because the terms of the arrangement are specific and entail strong verification protocols. This chapter focuses on the trust, in the precise legal sense of that term, and the relationship between the trustee of the trust and the trust’s beneficiaries and settlor. To what extent does trusteeship in the legal sense require trust in the general sense? The chapter examines the features of the express trust under modern U.S. law and practice that would seem to require there to be a significant degree of trust in the trustee by the trust’s beneficiaries and/or settlor. The paper also examines the features of modern U.S. trust law and practice that attempt to protect the trust’s settlor and/or beneficiaries so that they need not place worryingly high levels of trust in the trustee.

Why you care: As your organization moves into the “Fly” maturity phase, institutional memory, which contains a history of all experiments and changes made, becomes increasingly important. It can be used to identify patterns that generalize across experiments, to foster a culture of experimentation, to improve future innovations, and more.

This chapter introduces some terminology and themes that pervade the book. Compensation is defined broadly to include everything a worker likes about the job. “Strategic compensation” is about managing the compensation system to advance a specific organizational objective, typically profit maximization. The chapter discusses how this relates to talent management, turnover, retention, and employee productivity. Four recurring themes are introduced: (1) “Incentive effects” and “sorting effects (both of which affect the company’s labor productivity) arise when the compensation system is changed; (2) Market competition largely dictates pay levels, whereas employers have more control over pay design; (3) Competition forces employers to care about their employees’ preferences about pay; (4) Bargaining power also affects pay levels. The metaphor of a “3-legged stool” is introduced, in which compensation depends on workers’ desires, skills, and mobility. There’s discussion of what constitutes “fair” pay and the tradeoffs associated with allowing employees to know each other’s pay versus keeping compensation secret. The appendix offers a detailed treatment of nominal versus real compensation.