Anders Frederiksen, Stanford University

Abstract

Newly recruited employees have very different earnings trajectories. Some experience substantial earnings growth; others can hardly maintain their entry salary. This paper shows that on-the-job human capital acquisition together with explicit bonus incentives and implicit career concern incentives produce earnings dynamics which are sufficiently rich in explaining the observed heterogeneity in the evolution of earnings. Using the personnel records from a private-sector firm it is established empirically that explicit incentives can alter earnings by as much as 4.80 percent between two years and that implicit incentives reward high current period performance with 1.14 percent higher future pay. Thus, performance peaks pay but persistent high performance produces more permanent pay progression.