Perceived income, promotion and incentive effects

This paper examines the disincentive effects of perceived underpayment on individuals' exerted effort, attempting to find out if payment above or below a worker's perceived revenue product has a defined effect on their effort on the job.

A theoretical model is introduced that investigates the relationship between the level of effort invested in work and the difference between perceived and actual income of workers. Empirical evidence is obtained by analysing data on British academics.

It was found that, tenured academics (or in other words those on a permanent contract) will tend to invest less effort in publishing as the difference between their perceived deserved income and actual income increases. On the other hand, for non‐tenured (or short term contract) academics this relationship is ambiguous. The model predicts that if tenured staff also derive utility directly from publication, over and above that associated with income and promotion, the difference between perceived and actual income has a smaller negative effect on the actual effort invested in research.

The empirical dataset used in the analysis is cross sectional, therefore only able to analyse a snap‐snot of the academic profession at one point in time and not fully capturing the dynamic effects of underpayment on individual effort.

The paper fills a gap in both the theoretical and empirical work on the incentive effects of perceived underpayment. This evidence may be useful in designing reward packages.