Money and Status in a Meritocracy

Status is greatly valued in the real world, yet it has not received much attention from economic theorists. We examine how the owner of a firm can best combine money and status to get her employees to work hard for the least total cost. We find that if rewards are merit based, then she should use a small number of titles and wage levels. Moreover, she should motivate workers of low skill mostly by status and high skill mostly by money. This often results in star wages to the elite performers and in wage jumps for small increases in productivity.