ABSTRACT
This chapter explores the complex relationship between compensation and productivity. It focuses on the role of firms compensation policies in optimizing worker productivity. The chapter describes that many of the compensation policies are aimed at eliciting truthful signals from job applicants or employees. It explains the reason for rising wage profiles: they may be part of a delayed-compensation incentive system designed to attract and motivate workers who have long-term attachments to their employers. The employment relationship can be thought of as a contract between the employer and the employee. The chapter discusses the difficulties that must be surmounted in making employment contracts self-enforcing. Employers with internal labor markets have options for motivating workers that grow out of their employees expected careers with the organization. Employees can be protected later in their careers by obtaining part of their overpayment in the form of vested pension rights. Efficiency wages are likely to arise only in situations where structured internal labor markets exist.
