Editing Incentive (section)

=== Tournament theory ===
[[Tournament theory]] describes a framework of compensation based on an individual's position within a firm's hierarchy.<ref name=":4" /> The theory demonstrates that individuals are not promoted on the basis of their absolute performance and output, but instead based on their performance relative to other employees in the same position within the organization.<ref name=":4" /> ''Ceteris paribus'', the larger the difference in compensation between one position to the next, the greater the incentive to exert more effort in order to achieve a promotion.<ref name=":0" /> However, that incentive is diminished as the size of the firm (and therefore the potential candidates for promotion) increases.

Firms must address the risk that a relative compensation scheme could incentivize uncooperative behavior amongst co-workers. Accordingly, firms encounter a trade-off between incentivizing workers to increase their efforts by increasing pay variance between the promoted and the unpromoted and, on the other hand, minimizing disharmony amongst co-workers by maintaining some level of pay compression.<ref name=":0" />