Group vs. Individual Performance Pay When Workers Are Envious

We consider the effects on reward systems of workers' concern with relative pay by comparing the wage costs of providing incentives through group versus individual bonus schemes. When workers have a propensity for envy, either scheme may be the least cost one depending on the workers' outside opportunities and on the precision of available performance measures. The result follows from the trade-off between the dissatisfaction associated with the prospect of unequal pay and the incentives it generates when workers are envious.