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Victoria Wass

Personnel economics is the application of economic theories and mathematical approaches to the management of people at work. Like its disciplinary grandparent, it embodies a particular way of understanding and explaining individual and social behaviour, one that is based on modelling how economic agents respond to changes in the external environment where this changes the incentives that agents face. Using the example of performance-related pay, this chapter guides the reader through the distinctive approach of personnel economics, its foundations, its insights and its contribution to HRM. Basic theory and a simple model are used to show what performance-related pay might look like and why and when it might be effective. Performance-related pay has been criticized in the literature as much as it has been promoted. Personnel economics itself offers a sophisticated and comprehensive analysis of where and why performance-related pay might fail to work. However, incentives are central to personnel economics and, if pay is not a motivator of effort, then there is little utility for a theory which assumes that it is.