The relation between individual characteristics and compensation contract selection

In this study we examine the relation between individual characteristics and the choice of a compensation contract. Based on a framework introduced by Waller and Chow (1985), we propose that the choice of a compensation contract will be associated with three types of individual characteristics: task related skills, risk preferences, and psychological traits. The two psychological traits considered in our study are need for achievement and locus of control. We also examine potential interactions between individual characteristics and the choice of a compensation contract. In our research, participants initially practice a task and are given feedback, and subsequently select a compensation contract which is used to determine their pay during a real-effort work session of the same task. The menu of contracts is composed of a fixed pay contract without performance incentives, and two performance-based contracts reflecting moderate and high performance incentives. We find that skill is significantly associated with selecting a performance-based contract and the type of performance-based contract. We also find that risk preferences,need for achievement and locus of control are significantly associated with selecting a contract with performance incentives. We also find several instances of marginal significance with respect to need for achievement and locus of control moderating the relation between other individual characteristics and contract selection. Overall, our evidence suggests that both skill and non-skill characteristics are associated with individuals’ compensation contract choices.