A Model of Progressive Employee Compensation and Superstardom

Abstract

This paper identifies the condition leading to a progressive salary situation wherein the elasticity of compensation with respect to ability is greater than unity, i.e., a small percentage advantage in ability results in a disproportional increase in compensation. This analysis also helps explain the “superstar phenomenon” made famous by Rosen (1981). Two assumptions are made. The first is that there is a generalized Cobb-Douglas type of production function wherein different hierarchies of employees of different abilities are viewed as distinct inputs. The second is that the distribution of ability is bell-shaped or approximately normally distributed, and can be approximated by a Poisson distribution. The model is applied using average outgoing salaries of MBA students from different universities compared to their average test scores.

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S. Hamlen, W. Hamlen and L. Southwick, "A Model of Progressive Employee Compensation and Superstardom," Theoretical Economics Letters, Vol. 3 No. 3A, 2013, pp. 1-6. doi: 10.4236/tel.2013.33A001.

Conflicts of Interest

The authors declare no conflicts of interest.

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