Emotions and Compensation

I introduce a concept of emotions that emerge when workers evaluate their individual performances or when they compare their own performances with those of co-workers. I analyze the interplay of emotions and incentives by focusing on a certain scheme of worker compensation that is frequently used in practice: a piece-rate system. My findings show that standard results of compensation theory significantly change when introducing emotions. I identify certain conditions under which emotions lead to additional incentives and under which the employer benefits from emotional workers, and I sketch the impact of risk aversion on the interplay of emotions and incentives, and the influence of a worker’s success probability on the intensity of his emotions.