Training and pay-for-performance are used by firms to increase employee productivity and level of contribution. Training is a method that can improve employee's capabilities through human capital development, while pay-for-performance is known as a method that can stimulate employee's motivation to participate and induce cooperative behavior by linking compensation to performance. However, both practices require human and financial resources, so firms are placed in a situation where they must decide not only whether to adopt them but also at what intensity and level to implement them. Previous studies appear to have focused on examining the effects of training and pay-for-performance separately or on verifying the level of influence of each, and there seem to be relatively few studies that deal with firms’ simultaneous choice of the two instruments within a single integrated decision-making framework. This study presents a Stackelberg game-based model in which the firm chooses the intensity of training and the level of pay-for-performance, and employee's respond by determining their level of effort, and through this model seeks to show, by deriving the equilibrium, that the firm can maximize profit within the model.

Keywords

Training, pay-for-performance, Productivity, Wages, and Profit Optimization.