WHY DO EMPLOYERS ONLY REWARD EXTREME PERFORMANCE - EXAMINING THE RELATIONSHIPS AMONG PERFORMANCE, PAY, AND TURNOVER

This study develops an efficiency explanation for commonly observed performance-based compensation contracts that aggressively reward extreme performance while largely disregarding performance distinctions for moderate performance levels. In response to this reward-the-extremes contract, the paper predicts a relationship between performance and turnover that fluctuates by performance level. Evidence of the hypothesized contract and the resulting pattern of turnover are provided empirically with data collected from 984 engineering employees of two large high-technology companies in the San Francisco Bay Area. The data confirm that extremely high and moderately low performers are likely to remain in firms offering these contracts while moderately high and extremely low performers are likely to depart.