The Trouble with Tournaments, Economic Inquiry
The recent interest in tournaments, where pay is based on performance relative to one's peers rather than solely on output, results from the observation that the differences in the pay of chief executives and their immediate subordinates seems to be greater than the difference in their abilities or outputs. However useful tournaments may be in explaining the salary differences, it is important to assess the limitations of tournaments and to examine the claimed virtues of tournaments as incentive devices. Four areas are criticized: 1. the implementation of a handicap system to account for differences in innate abilities of workers, 2. the instability arising from the introduction of other compensation schemes, 3. the possibility of collusion among players to reduce their effort levels, and 4. the determination of a tournament winner when outputs are multidimensional (as is usually the case).
Dye, A. Ronald. 1984. The Trouble with Tournaments. Economic Inquiry. 22(1): 147-149.